Holding periods are something that every investor in commercial real estate deals with on a regular basis.
Many investors may question how sponsors determine holding periods and how they impact the transaction’s return.
We will look at holding periods, how they work, and how they impact investors who prefer short or long positions.
What is the Holding Period?
In commercial real estate, the holding period is the time that an investor must hold onto the asset to earn a return through price appreciation, income, or both.
The holding period starts the day a property is purchased and ends on the day the property is sold. While the holding period varies by investment, the average holding period for a commercial property is 5-7 years.
Holding periods are significant because they give owners time to execute their business plan for the property. A holding period also helps investors calculate their potential returns and understand how long their investment will be tied up.
Market conditions can affect the length of the holding period. Therefore, a holding period can be extended past the original plan until the market conditions are optimal for sale.
How Does a Holding Period Work?
As sponsors work to put together a deal on a commercial property, they will inform potential investors of the projected holding period for the project. The holding period lets investors know how long it might take to return their investment.
Sponsors seeking to assemble the equity capital and debt financing for a project use the holding period to entice investors to commit their money to the project.
Typically these funds are held throughout the holding period before they can sell it. Getting the capital upfront gives the sponsor leverage when pursuing their debt financing.
Locking in funds is a good thing for a sponsor, but it could be a problem as time goes by for the investor. During the holding period defined by the sponsor, an investor, in most cases, will not be able to access and sell his capital, making it illiquid.
Both sponsors and investors often find themselves looking for ways to increase liquidity as commercial real estate investments move through the holding period.
What Can be Done About Illiquidity During the Holding Period
With the typical hold period for commercial real estate investments being 5-10 years, the illiquidity of assets can be problematic for investors and sponsors.
The SecondRE Marketplace can help current real estate investors who need liquidity quickly buy and sell fractions of cash-generating commercial and residential properties with the sponsors’ blessings.
The SecondRE Marketplace also opens this market to accredited investors looking to invest in commercial and residential properties.
The SecondRE Marketplace for the Long and the Short
Commercial real estate investments’ holding period is critical for investors and sponsors.
For investors, the holding period is the time they will often have to commit their capital without access to it during the term of the holding period.
Sponsors use the holding period to attract investors to a project they are managing and help lock in critical capital to help them negotiate better deal financing.
Investors often must endure a long-term holding period as part of their real-estate investment.
The SecondRE Marketplace can get real estate investors out of a commercial real estate deal with the permission of their sponsors so that they can acquire liquidity.
It gives sponsors access to accredited investors looking to invest in commercial and residential real estate and flexibility to current and future investors.
Are you ready to gain access to the SecondRE Marketplace? Click Here to Create an Account and Get Started Today!
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