By Konrad Putzier
If Jesse Stein has his way, investors will soon be able to buy shares of individual buildings on the stock market.
Stein’s startup, ETRE Financial, which he co-founded in 2012 with Paul Frischer, helps developers and building owners list their properties on NASDAQ in exchange for a fee.
But while he hopes ETRE’s model will revolutionize real estate investing, it still has major hurdles to overcome.
Owners can use ETRE (short for Exchange Traded Real Estate) to list entire buildings or parts of a property, as long as the equity raised tops $25 million.
Stein explained that the firm uses a Delaware LLC structure, keeping fees at a relatively modest 0.5 to 1.5 percent of equity raised.
ETRE does the filing and registration and manages the stock listing, although an investment bank is still needed to distribute the shares.
By taking buildings public, Stein hopes to combine the advantages while avoiding the disadvantages of two of the hottest forms of real estate investments: public REITs and crowdfunding.
Public REITs grew in popularity in part because they offer investors liquidity — the ability to quickly sell their shares on the public market if they feel like it. But their generally large portfolios also made it difficult to determine what exactly an investor is buying into.
Crowdfunding, on the other hand, offers investors the transparency of buying into a single building, but it lacks liquidity. Notes generally have fixed terms.
According to Stein, ETRE hopes to combine the best of both worlds by offering the liquidity of REITs and the transparency of single-asset crowdfunding.
“The difference of doing this on a building-by-building basis is that you get more control over the allocation of your investment,” he said.
ETRE offers an online platform with detailed information on the listed properties, including the cap rate at current share price, the loan-to-value ratio and a report ranking each tenant.
Stein’s pitch sounds convincing enough to make you wonder why no one has bothered to take individual buildings public before. But while the advantages of ETRE’s business model are obvious, so are its challenges.
An initial public offering (IPO) is an expensive and time-consuming process, making it much more cost-effective to take a large portfolio public. Stein argues that ETRE’s use of technology and its Series LLC structure make the listing comparatively quick and cheap. And if the company can indeed be profitable on the fees it charges, he probably has a point.
Arguably the bigger hurdle facing ETRE is that building owners may be reluctant with an unproven startup.
“People who want cash want to know they can get it quickly and reliably,” said a real estate lawyer familiar with the firm. “The challenge is to find people who believe in him. Once he’s done it one or two times, it will be easier.”
Stein is optimistic that owners will come around. After graduating from Cornell in 2000, he spent years as an equities trader, before switching to real estate investment banking and advisory.
His most recent stint was as an executive vice president of acquisitions for United Realty Advisors, a real estate investment banking and advisory firm, which he left to join ETRE. He says his time working in real estate investment made it clear to him that the process of raising equity needs change.
For now, Stein is trying to convince building owners he can, in fact, raise them the desired capital on the stock market.
Although the firm opened for business in late 2013 after a long planning phase, Stein said ETRE has been in a “quiet period” and didn’t start marketing its services until late summer.
ETRE has yet to take its first property public. An IPO for the 170,000 s/f office building 1201 Connecticut Avenue in Washington, D.C., was in the works, but fell through after the owners changed their minds.
The timing seems to be on ETRE’s side. The U.S. commercial real estate market is picking up after several years of decline and stock markets are teeming with yield-hungry investors.
Stein is bullish that the firm can soon celebrate its first IPO. “We are relatively close on a number of assets,” he said. “The response has been tremendous.”