Reprinted with permission of the Rochester Business Journal.

VOLUME 29, NUMBER 27 WWW.RBJDAILY.COM SEPTEMBER 27, 2013

Broadstone sees opportunity in U.S. law changeBy THOMAS ADAMS

As of this week, private companies can publicly solicit and advertise share offer-ings to accredited investors, and Broad-stone Real Estate LLC is ready to take advantage.

The Rochester-based property man-agement firm—along with private equity funds, hedge funds and other private com-panies—is now less restricted by the U.S. Securities and Exchange Commission in what information it can provide.

The change was included in the Jump-start Our Business Startups Act, passed by Congress and signed into law by President Barack Obama in 2012.

A section of the JOBS Act directed the SEC to remove its prohibition on general solicitation or general advertising for se-curities offerings that qualify for the Rule 506 exemption, provided that sales are lim-ited to accredited investors and the issuer reasonably verifies that all purchasers of securities are accredited.

“It’s very meaningful for all kinds of companies to be open about what they’re doing and what they need capital for,” Broadstone chairman and CEO Amy Tait said. “It’s really great for re-energizing the whole capital system of the United States.

“For us, it in some ways enables us to get a lot of the advantages that public compa-nies have without being burdened by all the regulatory costs. And it means that we have a great story that we’re now able to tell.”

Broadstone sponsors and manages two private real estate investment trusts: Broadstone Net Lease Inc. and Broadtree Homes LLC.

“The majority of our business is run-ning those companies and making invest-ments and managing them,” Tait said. “But a sizable part of our business is raising the capital to allow us to grow and to allow us to acquire more properties.

“We do not use a broker-dealer firm to access investors. It’s really all been word of mouth. We’ve been surprisingly suc-cessful with word of mouth, with investors actually coming to us. But we think we’ll be a lot more effective by actually having

information out there for people to find us on the Internet or whatever.”

Broadstone launched an updated website Monday with details about the company and its REITs, after filing its Rule 506(c) paperwork with the SEC and distributing a press release.

“We now have a more robust platform to share information and add credibility to our approach,” Chief Financial Officer Christopher Czarnecki said.

“We have so many investors now in differ-ent parts of the country that having a more robust website with more disclosure makes them more comfortable about thinking about investing with us. It gives them another touch point to dig in and do the research.”

Accredited investorsAccredited individual investors must

meet certain minimum income or net worth levels, and institutions such as trusts, cor-porations and charitable organizations must meet certain minimum asset levels, the SEC states on its website.

“We’ve always only been available for accredited investors, which is laid out in very specific definition, but it usual-ly means someone with a $1 million net worth or a high level of annual income,” Czarnecki said.

“We still have to go through verifica-tion to ensure that people are accredited, and there are some additional regulatory things that are placed upon us to make sure

we’re only marketing and selling shares to accredited investors. Outside of that, it’s a great verification.”

Others will benefit, too, Tait said.“This hasn’t just been for us,” she said.

“This has been for all kinds of private eq-uity and hedge funds and everything else. I think it’s going to be very exciting for the market to have the opportunity to see what these guys are really doing.

“There is a choice. Some may decide they don’t want to publicly distribute their information and want to remain secretive. But for companies like ours that are grow-ing and want to have access to technology and information flow to grow our compa-nies, this is really exciting.”

SEC Commissioner Luis Aguilar, in a July 10 statement as Rule 506 was revised, opposed the change.

“I do not support this action because both the process followed in proposing the amendments and the actual amendments being considered today come at the ex-pense of investors and place investors at greater risk,” he said.

Company growthBroadstone Net Lease added its first out-

side shareholders on Dec. 31, 2007. Broad-tree Homes was founded in 2012.

“We couldn’t talk in any public way about the investment opportunities that we had or what our returns were or how many investors we had or what the investment size was—all things that are kind of inter-esting information, we think,” Tait said.

Broadstone Net Lease includes 187 properties in 27 states, with 700 share-holders from 32 states and five countries. It has raised $320 million since the end of 2007, Tait said.

“That has appreciated already, and we bring in new capital every month,” she said. “With some debt financing, we have about $700 million worth of properties around the country.”

The share price for Broadstone Net Lease is at $64, up from $50 at its start, Tait said. It has a dividend yield of 6.6 percent, or $4.20 annually.

“When we started, our minimum invest-

File photo by Kimberly McKinzie

Amy Tait

Reprinted with permission of the Rochester Business Journal.

ment was $50,000 because we wanted to have at least 100 shareholders to qualify as a real estate investment trust,” Tait said. “After a few meetings at the country clubs, we had 100 shareholders and the phone kept ringing.

“We realized that we were going to be in trouble eventually, because when we got to 500 shareholders we would be deemed public and be subject to all the regulations that a public company has.”

Tait’s family founded Home Properties Inc., a publicly traded company on the New York State Exchange.

“It’s very expensive, and there’s a lot of cost and overhead that goes with com-plying with public regulations,” she said. “We didn’t want to burden our sharehold-ers with that. So we started making it hard-er and harder to get in, so that we wouldn’t go to 500 shareholders.”

Broadstone raised its minimum invest-ment to $100,000, then to $250,000, then to $500,000. Investor interest did not sub-side, Tait said.

“We just kept meeting wealthier and wealthier friends, I guess,” she said. “But $500,000 is a big number for an individual in an alternative investment like this. It was hindering our growth. It was hindering the number of people that could invest with us.”

The JOBS Act in April 2012 immedi-ately allowed Broadstone and similar pri-vate companies to increase the number of shareholders to 2,000.

“With that, we lowered our minimum in-vestment from a half-million dollars back to $250,000, and we had quite a backlog of people come in,” Tait said. “We’ve had about 300 new investors in the past year. Many invest several million dollars with us.”

A new marketThe Broadtree Homes portfolio includes

100 single-family homes at its start. Half are in Irondequoit, Perinton, Pittsford and other Rochester suburbs, Tait said. The

rest are in the Palm Beach, Fla., and Min-neapolis markets.

“The single-family home industry is a new asset class and a very exciting area that has really come as a result of the housing crisis,” Tait said. “As the home ownership rate in our country has gone down from a peak of 69 percent to now 65 percent, that means about 5 million families that used to own and occupy a home are now renters.”

Broadtree has raised $12 million so far, Tait said.

“Once we knew the JOBS Act was going to allow us to go to 2,000 shareholders, we felt more comfortable going back to ac-cepting $50,000 as a minimum investment for Broadtree like we did for Broadstone, and we’re not going to use up all our slots too quickly,” she said.

The Rochester market is the test kitchen for Broadtree, Tait said.

“But Rochester isn’t a typical market,” she said. “Home prices have stayed stable. It was a good place for us to get our toe in the water and get some experience. But the next thing we wanted to do was get some experience at the opposite end of the spectrum, in a market that had experienced a lot of distress.”

Florida’s Palm Beach County fits that description, she said.

“Long term, however, we don’t think this business should rely on markets that are rebounding from distress, but on markets that are growing because of job growth,” she said. “Ultimately, a healthy housing market is going to be because of a healthy job market.”

Minneapolis fits that description, Tait said.“Renting isn’t synonymous with an apart-

ment complex,” she said. “Renting can be renting a single-family home, and there are a lot of homes that needed to be bought and repurposed. There’s been a big transition of homes being bought by investors, with the intention of renting them to families.

“This is not just something happening in

our cities or on Park Avenue. This is hap-pening in suburban neighborhoods with great school districts, serving a social need for these families but also helping to sta-bilize the housing market and helping to re-energize our entire economy.”

Prior to the mortgage crisis and Great Recession, 10 percent of the housing stock in the nation was rented, Tait said.

“It’s a very big part of our housing mar-ket, but it’s usually been all local mom-and-pop operators,” she said. “Now this is becoming more of an institutional asset class. Companies like Blackstone have in-vested $5.5 billion in the past year to buy houses all over the country.”

Institutional capital of $17 billion has been injected into single-family homes in the last 24 months, Tait said.

“By some estimates, this is really a $1 trillion move in our country,” she said.

Tait began thinking about this asset class more than three years ago, she said.

“We’re taking our time. We’re small. With our first 100 units, we’re going to get a lot of experience and understand the business before we scale it up. But our in-tention is to scale it up.

“We’ll have about 100 units within the next month or so, but we’d like to grow this to thousands of units. Hopefully we’ll be in many more markets in the next few years.”

Broadstone has more than doubled its employment in the last 12 months, from 15 to 32, Tait said.

“Real estate is about the most capital-in-tensive business out there,” she said. “The more capital we raise through these new channels, the more properties we can buy.

“Where that comes home to Rochester is the more transactions we can do and the more we can grow our portfolios of properties, the more people we can hire. The JOBS Act is translating into jobs and growth for us.”

tadams@rbj.net / 585-546-8303