Private Equity Finance and Securities
Compliance for Real Estate Developers
Developers and property owners must understand the risks
involved in recruiting passive investors.
By Suzanne Mulvihill, Haight Brown & Bonesteel
ANY REAL ESTATE development
transaction requires many moving
parts. Raising capital is one of the most
important aspects of the transaction.
Without it, most deals would not proceed. But negotiating the transaction
and inking the deal with potential investors does not end when the funding has
closed. And, more often than not, the
last thing on a developer’s mind is
compliance with securities laws.
Many developers and owners are
unaware that selling even a portion
of a real estate project in a tenancy
in common (TIC) or joint venture (JV)
structure may trigger securities compliance. Interests in any JV entity are
generally defined under the statute as
a de facto security. And although the
law was previously considered a gray
area for TIC interests, the U.S. Supreme Court unequivocally answered
the question in ruling that an undivided interest in a TIC is also within
the definition of “security” under the
Securities Act of 1933.
Developers face two potential pitfalls
where securities compliance is triggered: 1) registration of the securities themselves and 2) sale of the
securities by an unauthorized person.
Under the Securities Act of 1933,
Filing Notices and Selling
any offer to sell securities must either
be registered with the Securities
and Exchange Commission (SEC) or
meet an exemption. Regulation D
of the Securities Act contains three
rules providing exemptions from the
registration requirements, allowing
companies to offer and sell securities
without registering them with the SEC
— Rules 504, 505 and 506.
Most issuances for developers are
exempt from registration, provided the
offerings are limited in nature. The
regulations provide a safe harbor for issuers, or sponsors, where they may file
the requisite paperwork setting forth the
applicable limited offering exemption
with the SEC and state regulators.
Failure to file such notices could
result in the issuer being barred
from qualifying for any Regulation D
exemption in the future. Rule 506,
in particular, includes the so-called
“penalty box” binding the founders
to the disqualification as well as the
company. Developers acting as sponsors should always review pertinent
federal and state laws before any kind
of issuance to determine if an applicable exemption is available.
The very act of selling the interests in
such projects may also trigger compliance with securities laws. Any person
engaged in the business of buying
and selling securities for their own
account through a broker or otherwise
is considered a broker-dealer requiring registration with the SEC, subject
to certain exemptions. This catch-all
definition would include many, if not
all, developers who act as sponsors
seeking to sell interests in any portion
of their projects.
To determine if the broker-dealer
must register, the SEC analyzes the
opment costs needed to build over
the rail yards. In addition to affording
views across the Hudson, the plan has
leveraged the site’s connectivity with
a new subway station and a link to the
popular High Line public park.
After three years of revising and
developing the master plan, testing
multiple retail podium designs and
tower configurations, construction
began on the first tower in December 2012. Related continued to
test variations on the master plan
to maximize the site’s development
potential for another two years. In the
process, it eliminated one of the three
original towers, varied the number of
retail floors within the podium, tested
multiple anchor tenant sizes and
locations, and added and subtracted
entertainment and food and beverage
programs to find the optimal mixed-use program for the project.
A master plan can impact surrounding
land values even before construction
begins. Property values on Manhattan’s
entire West Side skyrocketed as the
Hudson Yards master plan advanced.
According to “An Investment That’s
Paying Off: The Economic and Fiscal
Impact of the Development of Hudson
Yards,” a 2016 report prepared for
Related and its partner in this project,
Oxford Properties Group, the economic impact of the development
project, once it is fully operational, is
expected to add nearly $19 billion
annually (in 2018 dollars) to New
York City’s GDP, accounting for about
2. 5 percent of citywide GDP.
Investment in master planning continues to pay off in projects large and
small. A little planning goes a long
By Nitin B. Desai and Philip Wilkinson Jr., AIA,
architects, AE7 Planners and Architects
Note: Wilkinson was project architect for the design
team that master planned the retail podium at
Hudson Yards while at Elkus Manfredi Architects,
which is designing The Shops at Hudson Yards.