Risk factors.

Overview. This page is provided for general educational purposes. It is not an offer to sell or a solicitation of an offer to buy any security, and it is not investment, legal or tax advice. Any specific offering would be made only through definitive offering documents, which would contain their own risk factors governing that investment.

Speculative nature

Real estate markets decline without warning, sometimes resulting in significant losses. Risks include changing laws, including environmental laws; floods, fires and other acts of God, some of which are uninsurable; changes in national or local economic conditions; changes in government policy, including interest rates set by the Federal Reserve; and international crises. Invest in real estate only if you can afford to lose your investment and are willing to live with the volatility of the industry.

Illiquidity

Real estate is generally illiquid and cannot typically be sold quickly for cash at fair market value. An investment may not be able to sell a property as quickly, or on the terms, it would like. Significant sums may need to be spent to correct defects or make improvements before a property can be sold.

No guarantee of distributions

The ability to make expected distributions, and ultimately to return capital, depends on a number of factors, some of which are outside the sponsor’s control.

Limited participation in management

An investor generally has no right to vote on or participate in managing an investment except on very limited matters. The manager makes all decisions, including investment decisions, and investors typically have the right to remove the manager only in narrow circumstances.

Property values can decline

Factors that could reduce the value of a property include changes in interest rates; competition from existing properties and new construction; changes in national or local economic conditions; changes in zoning; environmental contamination or liabilities; changes in local market conditions; fires, floods and other casualties; uninsured losses; and undisclosed defects.

Ability to attract and retain residents

Success depends on attracting and retaining residents. Demand, competing supply, local employment conditions and the physical condition of a property all affect occupancy and collections.

Operating expenses

The costs of operating real estate, including taxes, insurance, utilities and maintenance, tend to rise over time. An owner has limited control over some of these costs, and increases reduce the amount available for distribution.

Reliance on third parties

If a third-party property manager or contractor performs poorly or becomes unable to fulfill its obligations, the business can be severely disrupted and financial condition adversely affected. Disputes with service providers may result in litigation or other proceedings.

Financial projections

Projections reflect assumptions believed reasonable at the time they are made. If those assumptions prove mistaken, for better or worse, actual results are likely to differ from the projections, possibly by a wide margin. The real estate industry can be volatile and difficult to predict.

Inability to implement a liquidity transaction

A hold period is an intention, not a commitment. Market conditions may delay or prevent a sale or refinancing, which could delay the return of capital indefinitely and may result in losses.

Need for additional capital

Real estate is capital intensive, and an inability to obtain financing can limit growth. Additional money may be needed to acquire or operate properties, or to make capital improvements required by law or market conditions. If additional funding cannot be raised when needed, operations and prospects could be negatively affected.

Risk of dilution

If additional capital is raised in the future by issuing equity interests, an existing investor’s ownership interest would be diluted.

Risks associated with leverage

There is no guarantee that a property will generate sufficient cash flow to meet debt service obligations, or that debt can be repaid, refinanced or extended when due. Lenders typically hold security interests in the assets. If debt service obligations are not met, those assets could be foreclosed upon. Assets may also have to be sold at unfavorable times to repay debt.

Liability claims against a property

Investors in a limited partnership or limited liability company structure generally have liability limited to the amount of their investment, and are not personally liable for claims against a property. The risk here is to the investment itself. Even where properties are maintained in a commercially reasonable manner and insurance is carried in amounts believed adequate, a personal injury or similar claim can exceed coverage or be uninsured, and the resulting loss is borne by the property and therefore by invested capital.

Environmental risks

Typical environmental testing is conducted on properties acquired, but under federal and state law a current or previous owner may be required to remediate hazardous conditions regardless of whether the owner knew of or caused the contamination. Owners may also face common law claims from third parties.

ADA compliance

The Americans with Disabilities Act requires public buildings to meet accessibility standards. If a property is not compliant and is not grandfathered, or if additional requirements are imposed in the future, modifications and additional expenditures may be required.

Casualty losses

A fire, earthquake, storm, mold infestation or other casualty could materially and adversely affect the operation of one or more properties, even where adequate insurance is carried.

Changes in law

Changes in law, including zoning, environmental, tax, and the rules governing how money may be raised from investors, could reduce returns.

Uninsured losses

Some risks cannot be insured at all, or cannot be insured on an affordable basis. An uninsured loss is therefore possible.

Joint venture risk

Investments may be made through joint ventures with financial partners. A venture partner may have financial, business or other interests inconsistent with those of the investment, including with respect to acquisition, financing, sale or refinancing, or the timing of those activities. Disputes between venture partners may result in litigation or arbitration requiring significant time, money and other resources, and may adversely affect financial position.