AI Quarterly Summer 2014

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ALTERNATIVE INVESTMENTS QUARTERLY

SUMMER 2014 VOLUME 8 ISSUE 3

Elementary Due Diligence

All of the facts lined up. So far, nothing suspicious had come to light. But then‌ I Demystifying Crowdfunding I Section 1031 Exchange I An Investment for All Seasons I REISA News

REISA

Annual Conference & Trade Show

September 14-16

Caesars Palace, Las Vegas

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SUMMER 2014 VOLUME 8 ISSUE 3

ALTERNATIVE INVESTMENTS QUARTERLY

REISA EDITORIAL BOARD

1 President’s Letter Strength in Numbers!

President’s Letter

Strength in Numbers!

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By Mark Kosanke, Concorde Investment Services

Executive Director’s Letter A Theme Before the Plot

Chair I Brandon Balkman I Orchard Securities Linda Dewlaney I Preferred Partnership Services Eric Perkins I Perkins Law PLLC

4 Elementary Due Diligence

Brandon Raatikka I FactRight, LLC

CONTACT INFORMATION

8 Demystifying Crowdfunding

REISA I 10401 N Meridian St., Suite 202 I Indianapolis, IN 46290 Direct: 317.663.4180 I Toll Free: 866.353.8422 Fax: 317.815.0871 I E-mail: reisa@reisa.org John Harrison I Executive Director I 317.663.4172

Jennifer Fitzgerald I Director of Marketing I 317.663.4175 Tony Grego I Director of Business Development I 317.663.4173 Design I DesignMark I Susie Cooper

reisa.org

in many important ways. From a financial standpoint the association has operated in the black with a bit left over to fund reserves for future growth. This is in contrast to our “challenging” years of the past. Today, most importantly, we are financially sound and committed to remain that way.

Section 1031 Exchange —Vital to America

members. Member involvement is also stronger than ever as more and more members see the benefit of

have enjoyed a banner year in large part due to our focus on education and the value offered to all our actively participating in events, working on committees, assisting in projects, and making a difference through lending their varied talents. There are so many smart, talented, creative people working among us making this

15 An Investment for All Seasons: Non-Correlated Income Producing Equipment Investing

association great. My hat is off to them!

Conference participation is at unbelievable levels in every category and we’ve enjoyed sold out events throughout the year. Our Due Diligence Forum this past July was the best ever. The Forum is a good example of something that started out small, and thanks to some hard work and commitment, has grown into an extremely valuable event and a “must-attend” for our broker-dealers. Strong conferences today allow us to plan for even larger, more value packed and relevant events in the future.

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So what does this all add up too? To me it adds up to the strongest Alternative Investment Securities Association in the industry. It means you are a part of an association that has grown from a one product focus in the beginning to encompassing all alternative and direct investments the securities world has to offer. We are no longer just real estate with some oil and gas thrown in. We are alternatives!

By REISA, formerly the Tenant-In-Common Association.

copy substantial portions of the publication for any reason without

And the numbers are looking really good! This year I am proud to say that REISA has continued to grow

to expand in every category from Associate, Sponsor, Affiliate Firm and Affiliate Individual. Conferences

Copyright © 2014

for personal use. However, it is a violation of U.S. copyright laws to

metrics we watch here at REISA, it’s all about the numbers to me.

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REISA News & Events

All rights reserved. Readers may copy sections of this publication

mix of our members, the participation of our sponsors, the attendance at our events, or any one of the other

Our membership today enjoys its greatest participation level ever. Interestingly our membership continues

Adam Abubakr I Director of Accounting & Data Systems I 317.663.4177 Tanisha Bibbs I Education & Meetings Coordinator I 317.663.4174

As a CPA, I tend to be a numbers guy. Whether it’s looking at the bottom line, the percentage

20 REISA 2014 Annual Conference

Our many members and the REISA staff, including our Executive Director John Harrison, have helped to transform and position the association for powerful growth and meaning going forward. To be sure, we will be the industry leader in alternative and direct investments.

permission. The Copyright Act of 1976 provides for damages for

As I come to the final few months of my short time as President I want to thank everyone—the staff, my fellow

illegal copying. If you wish to copy and distribute sections of this

Board members, committee chairs, volunteers and all who have participated in making this a truly great year. I look

publication, contact Jennifer Fitzgerald at jfitzgerald@reisa.org.

forward with much excitement as the association continues to build on all the efforts of the past year. I personally ask and encourage everyone to be a part, volunteer, participate, and, most of all, to constantly encourage membership.

Because we really do have Strength in Numbers! ▲

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Executive Director’s Letter

A Theme Before the Plot

Show me a conspiracy theorist, and I’ll show you someone who’s never worked for the government. There’s no plot, but there can be a theme.

By John Harrison, Executive Director, REISA

There may or may not be a plot, but there’s most always a theme. Some sports have plots: games like baseball or soccer or basketball develop a story line in a direction with players and strategies, and we enjoy the plot. But other more simple sports like swimming and running don’t have much plot, you just do it. That’s the theme (and Nike picked up on that). To know your theme is essential, it’s more important than even knowing your plot. And the ability to articulate your theme makes all the difference. Let me give you an example.

Once, when I was in officer training in the U.S. Air Force, a memo went out that there was to be no more trash in the trash cans in the barracks. No explanation for the new regulation. So, all the nervous trainees began running amok stuffing assorted trash under mattresses and above the ceiling panels, and flushing all sorts of foreign objects down the toilets. No telling how much money was wasted having plumbers unclog the pipes, nor how many fruit cores and banana peels might still be rotting above the ceiling tiles.

“It’s got to be part of a big plot to teach us something; man, these guys are thorough in thinking about our training. Perhaps it’s to teach us how to hide things if we’re ever captured and become POWs.” I heard my classmates wondering about the meaning behind the no trash directive.

“Are you kidding?” I said. “Some captain walked through a dorm and saw a pizza box sticking out of a trash can and told some sergeant who told the colonel that trash is overtaking the base. The colonel told

swear I’m not making this up, it said: CARRY OUT PACKAGING PERSONNEL ARE NOT FEDERAL EMPLOYEES. THEIR ONLY REMUNERATION ARRIVES IN THE FORM OF GRATUITIES FROM THE PATRONS. “Sergeant,” I looked at the MP and promulgated, “rip that sign down and get

to everyone, instead the rules were promulgated. A good promulgation at least sounds like it has a theme to it.

one put up there that says, ‘BAGGERS WORK FOR TIPS ONLY’.” I kept the

There’s no plot. And the theme is probably not stated simply either.

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put up a big sign in bold government font whose proclamation sticks in my mind. I

someone to fix it, and thus a sudden regulation was promulgated.” Of course, no rule was just posted or told Show me a conspiracy theorist, and I’ll show you someone who’s never worked for the government.

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know about the new bagger program and know to tip the kids. Thus, the commissary

theme simple.

Like most things, governments grow by accretion. And by definition this means

Before I left Uncle Sam’s great full-time employ and went to the Reserves, my last job was to translate

only a piecemeal, short term design, no long term plot. The theme to survive that

government-speak into English (they had a job for that?). The theme was to simplify, but the plot thickened

is to take heart that small—seemingly inconsequential—acts really can have big

one day. I was called to an “urgent non-essential personnel incident” at the base commissary. The grocery

long term results. For those of us who take pride in our profession and in the small

baggers were having a protest because they weren’t getting enough tips. These grocery baggers were casual

designs and details we do every day, this is great encouragement.

day workers (mostly teenage kids of personnel stationed on base) who helped bag groceries in return for

How we label ourselves and name our theme is important. Some have asked me,

tips. Things were getting out of hand, and a weary MP was trying to calm down the protest. I arrived on the

“is there a theme for REISA’s upcoming conference?” Yes, our theme for our REISA

scene—a young officer on emergency wordsmith duty.

conferences is simple: provide the best education and networking possible for the

Apparently, the whole informal bagging program had just started the week before. It was a program of good

alternative and direct investment industry. You design your own plot of who you want

intent: give teenagers a chance to perform a needed service and get a little money, with no real government

to see, which booths you want to visit, and which sessions you want to go to, et

red tape involved. The kids had asked the commissary manager to put up a sign, so that everyone would

cetera. We’ll provide the theme: the best! See you in Vegas. ▲

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Elementary Due Diligence

By Brandon L. Raatikka, Esq. FactRight, LLC

All of the facts lined up. So far, nothing suspicious had come to light. But then…

No, this isn’t the script from the latest prime-time sleuthing drama ( I highly recommend the BBC’s Sherlock series, by the way). This exciting discourse is none other than a play by play of investment due diligence.

What is due diligence? Due diligence is more than satisfying a legal standard. It’s an obligation, sure, and one that can be viewed as following a technical “science,” but it’s also an art, and even part calculus that changes over time. At its core, due diligence involves uncovering and assessing material facts—the essential craft of a good detective—and uncovering mitigants to the risks that arise from the facts whenever possible.

For REISA members, due diligence is summed up as the affirmative effort to gain transparency and understanding around the enormous complexity of alternative investments.

It should answer three very important questions: 1) What is the investment sponsor trying to do? 2) Are the risks associated with the investment worth taking? 3) How could this investment fit within the context of a larger portfolio? After all, according to The Greenwich Roundtable’s 2010 white paper titled Best Practices in Alternative Investments: Due Diligence, “We shouldn’t invest in anything we can’t comprehend or that the manager can’t explain in understandable terms.”

Ultimately, due diligence should give the broker-dealer confidence to make an informed investment decision (along with suitability analysis, of course). And while due diligence isn’t a “one-size-fits-all” affair, Sherlock might say that there are elementary hallmarks of reasonable due diligence—the standard prescribed by the SEC and federal courts, and affirmed by FINRA NTM 10-22 for private placements—you should consider when undertaking your due diligence process.

At its core, due diligence involves uncovering and assessing material facts—the essential craft of a good detective—and uncovering mitigants to the risks that arise from the facts whenever possible.

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Due diligence follows a “science.”

Due diligence will vary from product to product and from sponsor to sponsor; however, your due diligence process should remain relatively consistent across the board. It should be designed to discover the material facts and risks of every reviewed issuer and to consider them carefully. Standard questionnaires, document requests and reviews, and independent sources, such as third party due diligence reports, market report, and data, all have their place in a standard process.

When conducting due diligence, it’s important to look at both the sponsor (or investment manager) and the offering (or product).

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While due diligence isn’t a “one-size-fitsall” affair, Sherlock might say that there are elementary hallmarks of reasonable due diligence—the standard prescribed by the SEC and federal courts, and affirmed

by FINRA NTM 10-22 for private placements—you should consider when undertaking your due diligence process.

When conducting sponsor due diligence, consider the “4 Ps”: People – The aforementioned Greenwich Roundtable white paper also reminds us that a private investment is “a bet on a few key individuals and their team.” In other words, the team members syndicating and managing the offering are paramount. Consider their experience with the type of business plan the offering involves. Background checks are, of course, critical. Also important is the ongoing viability of the sponsor entity.

Process—Investigate the sponsor’s processes. How does it go about making investments or executing its business plan? Is the plan reasonable and adequate?

Philosophy—Step back to examine the sponsor’s philosophy. What is its business plan? Where is the market opportunity, and how is the sponsor planning to approach it? It’s important to remember that a sponsor’s philosophy drives its processes. Likewise, if a sponsor has poor processes, its philosophy won’t matter much.

Performance—It pays to assess the past. Does the sponsor have a track record with similar business strategies? If so, does the investment team share its history? Does the broader market explain performance or lack thereof over time? Rarely will an experienced investment sponsor have an unblemished track record. Examine the sponsor’s response, management or mitigation of underperformance. What lessons did the sponsor carry forward from its experience?

Offering due diligence requires a keen eye. Investigating the offering should involve a close review of its assets through appraisals, market reports, other independently prepared documents, and even physical inspection where appropriate. This investigation should also focus on the offering’s financial statements, model (i.e. the reasonableness of significant assumptions and factors on which investment success is expected to depend) and legal structure, including investment terms.

It’s important to review offering documents for material terms, keeping an eye out for any inconsistencies or inadequacies of disclosure. Verifying material factual statements is a must, too.

Finally, due diligence calls for understanding the use of the offering’s proceeds, as well as the business prospects of the investment program.

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Simply put, there are few hard-and-fast requirements for due diligence that apply to every case. Courts have found that the nature of due diligence required for a transaction depends on various factors, including the size and history of the sponsor, along with the broker-dealer’s prior dealings with it.

Due diligence in any form should look to pinpoint red flags, which signal the need for further investigation. And in today’s world, this calls for an intuitive approach, going beyond a standard checklist or process.

There are a lot of risks and market opportunities involved in alternative investments and they aren’t black and white. Because due diligence is heavily dependent upon circumstances, asking relevant questions of sponsor management is critical. And, as any seasoned investigator will tell you, asking relevant questions is most certainly an art.

Discussions with sponsor management should be one keystone of your due diligence process.

That’s because face-to-face talks can help you gain insight into a manager’s intentions—something that’s often hard to grasp through a document review. This is especially true as investment options become more novel.

At the same time, it’s prudent to recognize that a sponsor can often change their intentions without investor approval. Anything the sponsor says should be checked against what the offering documents allow. Every sponsor can tell a good story; however, its perspective may cloud the full story behind the investment.

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Due diligence changes over time.

“Reasonable” is a contextual concept—especially in terms of due diligence. It implies a given set of circumstances, which change over time on both a macro level and on an ad-hoc basis.

For this reason, due diligence standards must—and do—change over time. This happens not only when regulators issue additional guidance but also as markets gain sophistication, which is happening now within the growing space of alternative investments.

Similarly, due diligence doesn’t end with the signing of the selling agreement. Continuing to monitor the investment program as it operates enables you to better serve your clients while being watchful for problems. For example, if problems arise and the offering is still open, you’ll be able to terminate the selling agreement and keep clients from a bad deal. Even if the offering is closed, continuing to monitor the investment on behalf of your clients is key to providing the right kind of customer guidance.

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Due diligence is an art.

Face-to-face talks can help you gain insight into a manager’s intentions— something that’s often hard to grasp through a document review.

This is especially true as investment options become more novel.

Due diligence involves calculus (of risk).

The goal of due diligence should be to establish a well-informed position fit for undertaking the subjective calculus (no need for traumatic flashbacks to high school math class) involved in an investment decision. Well-performed due diligence should allow you to discern relevant facts and weigh their significance. Only then will you be able to ascribe the likelihood and significance of certain scenarios.

For instance, a specific event or condition may represent high stakes, but it may not be very likely to occur (e.g., the lease default of a well-capitalized, AAA-rated tenant). Alternatively, an event may be very likely, but its risk may be low or of a customary magnitude (e.g., market competition).

Regardless, your due diligence process should allow you to focus on resolving, mitigating or getting comfortable with the risks.

So now that we’ve covered what I consider to be four elementary hallmarks of reasonable due diligence, I leave you with this thought: Always document your due diligence process.

Complete files not only offer protection against lawsuits, arbitrations and enforcement actions but also provide a foundation for conducting ongoing due diligence. After all, not all detectives can rely on the kind of mnemonic powers (a.k.a., the mind palace) Sherlock possesses! ▲

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Demystifying Crowdfunding

Excerpted from The

By Scott Purcell FundAmerica

and Debt Crowdfunding

Definitive Guide to Equity

by Scott Purcell

There are seven titles to the JOBS Act, and four types of crowdfunding. Let’s talk about how brokers can take advantage of crowdfunding provisions in the JOBS Act to assist small- and medium-sized businesses in raising capital in a regulated world.

First, what exactly is “crowdfunding?” And is it the same thing as “crowdsourcing?” The term crowdsourcing refers to a group of people (the “crowd”) being leveraged (“sourced”) to collectively accomplish some goal. And when it comes to “crowdfunding” there are four ways that crowds of people are sourced for funding; donation (e.g., RedCross.org, MakeaWish.org), rewards (e.g., Kickstarter.com, IndieGoGo.com), peer-to-peer lending (e.g., LendingClub.com, Prosper.com, Kiva.org), and equity and debt securities (e.g., RealtyMogul. com, Fundable.com, FundAmerica.com).

Before the JOBS Act became law in April 2012, it was illegal in the United States for a business to raise private capital via general solicitation from people with whom an issuer did not have a preexisting relationship. Two of the JOBS Act’s seven titles address a business’s ability to obtain funding in this manner: Title II Access to Capital for Job Creators modifies Rule 506 of Regulation D of the Securities Act of 1933 to remove the ban on general solicitation and make it easier for businesses to raise capital from accredited investors by advertising their offering any way they want, so long as only accredited investors (whose accreditation is “reasonably confirmed”) are permitted to invest. This becomes an incredibly powerful tool when combined with Title V Private Company Flexibility and Growth, which increases the number of investors a company can have before being forced to publicly register (up to 2,000 exempting shareholders who acquire equity as part of an ESOP).

From a strict legal and regulatory viewpoint, Title II does not technically provide for “crowdfunding.” However, the reality is that it comprises “crowdfunding for rich people,” and the media and general public casually refer to both Title II and Title III as crowdfunding.

Title III enables “crowdfunding” by amending Section 4 of the Securities Act of 1933 to create a new exemption under which private companies can raise up to $1 million in capital annually from investors, whether accredited or not, by using the internet. It caps any investor’s ability to participate in small business capital formation to between $2,000 to $100,000 per year, all offerings combined, depending upon their income or net worth (even Warren Buffet would have a max cap of $100,000 per year across all Title III deals).

Furthermore, the JOBS Act puts in place onerous accounting and reporting obligations for issuers who raise capital via the Title III’s exemption, which goes far beyond what a company has to comply with if they were to use a Title II 506(c) offering. For example, a business undertaking a Title II offering has to file a Form D one time, whereas if it uses Title III, it has to file a Form C at the offering initiation, at the midway point of the fundraise,

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Before the JOBS Act became law in April 2012, it was illegal in the United States for a business to raise private capital via general solicitation from people with whom an issuer did not have a preexisting relationship.

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The term crowdsourcing refers to a group of people (the “crowd”) being leveraged (“sourced”) to collectively accomplish some goal. A n d w h e n i t c o m e s t o crowdfunding there are four ways that crowds of people are sourced for funding:

Donation (e.g., RedCross.org, MakeaWish.org)

Rewards (e.g., Kickstarter.com, IndieGoGo.com)

Peer-to-peer lending (e.g., LendingClub.com, Prosper.com, Kiva.org)

Equity and debt securities (e.g., RealtyMogul.com, Fundable.com, FundAmerica.com)

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at the close of the fundraise, and then annually thereafter. And whereas there are no accounting requirements for a firm raising capital via Title II, a business raising capital via Title III has to produce financial statements according to GAAP, has to have them certified by a CPA if raising more than $100,000, and has to have them audited if raising more than $500,000.

The SEC has not yet issued final rules for Title III “crowdfunding,” and once it does, FINRA will need to craft rules and guidance for brokerdealers and for a new “registered portal” membertype. Thus, it is not expected that fundraising via Title III will be permissible until the first quarter of 2015 at the earliest. Even then, if one considers the extreme limitations placed upon institutional investors (which will effectively remove them from participating), and the burdensome rules on issuers, there is some debate as to exactly how much capital formation will actually occur via Title III. It is likely that most brokers and businesses will simply opt to use Title II almost exclusively and use Title III only for amounts of $100,000 or less. The proposed SEC rules would allow for a business to raise capital via simultaneous, “concurrent” Title II and Title III offerings and thus enable it to cast a wider net while minimizing compliance obligations.

“Equity crowdfunding” is a commonly used term that can mislead people about the JOBS Act. In fact, we expect the vast majority of Title II and Title III capital to be raised as debt, not equity. The reason is that equity is really only viable for businesses with a clear shareholder exit strategy, and 99% of them do not meet that test as they are unlikely to ever go public or be acquired for some large multiple. And even for the 1% of businesses who can make a case for equity investment, investors in small businesses with no prior professional funding are generally better served with convertible debt instruments that avoid messy valuation issues and give them some security in the assets of the company.

People speak of the “disintermediation” of brokers due to online funding platforms. However, compliance issues remain front and center regardless of which exemptions are used when raising capital, and nobody is better equipped to

assist with that, along with getting offerings sold, than securities brokers. The 1933 Act follows the doctrine of a “philosophy of disclosure,” which means that enough detail must be provided such that an investor can make a reasonably informed decision about purchasing the securities of a company. This becomes extremely important when soliciting generally (“publicly”) to people with whom the business or its brokers do not have a preexisting relationship. As such, companies need more than just a business plan and financials so brokers and others can conduct due diligence and get meaningful disclosures such as licensing issues, business litigation, executive compensation, and other data as is appropriate for the business and its offering of securities. On top of that, even when using federal exemptions from registration, there are still state considerations regarding filing forms (such a Form D) and regarding the registration of persons selling securities to state residents (which may require state registration as a securities broker even though the securities themselves are exempt). Brokers are required by regulators to be licensed in all states they sell securities and to perform background checks and due diligence on all businesses for which they assist in raising capital, thus enhancing investor protection, and on all investors who participate in a securities offering (anti-money laundering, financial crimes, terrorist lists, etc.), thereby enhancing issuer protection.

The JOBS Act is ushering in a new era of capital formation for businesses, with the ability to raise private equity and debt capital via the internet and other forms of general solicitation.

It’s critical to understand and comply with the rules being issued by the SEC, and to recognize the responsibilities along with the opportunities of the new exemptions. Brokers can once again profitably participate in the capital formation of small businesses, including startups. With the advent of software that enables broker-dealers to have their own online funding platforms, complete with detailed compliance tools, the doors are opening for an incredible acceleration in job creation and growth in the nation’s existing 28 million small- to medium-sized businesses, as well as the 500,000 new businesses started every month. It’s a great time to be a broker. ▲

With the advent of software that enables broker-dealers to have their own online funding platforms, complete with detailed compliance tools, the doors are opening for an incredible acceleration in job creation and growth in the nation’s existing 28 million small- to mediumsized businesses, as well as the 500,000 new businesses started every month.

It’s a great time to be a broker.

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Section 1031 Exchange —Vital to America

By Dan Wagner, The Inland Real Estate Group, Inc.

Tax reform discussions which have been circulating around Washington, D.C., over the past year often have the stated goal of ultimately reducing the corporate tax rate. As we might suspect, solutions may not be a simple unilateral reduction of taxes at all, but instead may involve seeking other ways to potentially raise taxes—in the case of Section 1031 Like-Kind Exchanges, the talk is of eliminating or reducing this vital and economically-stimulating tax deferral.

No formal legislation has been brought forward, but unfortunately the House Ways and Means Committee and the Senate Finance Committee have put forward ideas that would eliminate the Section 1031 Like-Kind Exchange as part of a larger tax reduction package. The President has also put forward a budget greatly reducing the effectiveness of the 1031 by capping transactions at $1 million.

Anyone involved with a 1031 Exchange clearly understands the synergistic value of what the 1031 does for our U.S. economy. Instead of selling a given property and paying the Capital Gains Tax, the property owner—without the Like-Kind exchange—would likely hold on to the property much longer to avoid paying an immediate tax. Such 1031 Like-Kind exchanges provide immense economic interests: the property owner looks for new properties, buildings, equipment and other investments to purchase as part of the tax deferral aspect of the exchange. Although trade associations and economists are crunching the needed predictive numbers, it doesn’t take much to foresee the potential slowdown resulting from billions lost to the investment stream.

The negative impacts are many, but even the government itself would be hit, for local governments will face an immediate reduction in their transfer taxes.

Municipalities would see the normally positive impacts of 1031 Exchanges in their communities disappear as owners are no longer incentivized to upgrade into new buildings, which in turn diminishes renovation of outdated facilities, reducing much needed contracting jobs. Even the environment would be punished as conservation easements—a feature of some Like-Kind exchanges—would diminish.

The real estate community headed up by the Real Estate Roundtable and groups like the National Association of Realtors, National Association of Real Estate Investment Trusts, International Council of Shopping Centers, REISA and the IPA, to name just a few, and the Federation of Exchange Accommodators are coming together to fund groundbreaking studies to give empirical evidence of the quantitative and qualitative factors that make the 1031 Like-Kind Exchange such a vital part of our economy.

There is an old saying in Washington, D.C., that is very applicable to this situation: “If you don’t have a seat at the table, then you will likely be on the menu!” We need everyone who is interested in keeping the 1031 Exchange as one of the most effective and robust economic development tools to be engaged with their elected officials so they know just how important Section 1031 Exchanges are to the U.S. economy and the American taxpayer.

I just returned from a trip to Washington, D.C., and, after talking with many congressional staff members, I was alarmed at how little many of the staff knew about the 1031 Exchange. Invariably, when I mentioned Section 1031, it seemed like the staff person was going to say, “No, it is 11 o’clock!” We really need the

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As equity markets continue to climb higher and interest rates remain low, experienced portfolio managers with a long term view of the market are beginning to rebalance their portfolios to lock in gains and position portfolios for long term sustainability.

One way to achieve this objective is through an allocation to truly non-correlated investments. While the last few years have challenged many asset classes that have historically been considered non-correlated, certain equipment lease investments continued to perform throughout all cycles. The key is the segment of the market in which the investments are made. Specifically, the sement in the middle market space, avoiding high-volume leasing of copiers, printers, and automobiles, and staying away from highly leveraged big ticket items like airplanes and oil rigs.

Using a straightforward investment strategy that focuses on this segment, investment advisors can generate income and asset-appreciation on a non-correlated basis by investing in funds that purchase business-essential, revenue-producing assets and equipment.

Investments in such funds are collateralized by a security interest in, or direct ownership of, assets and equipment that generate regular cash flow for distributions. These programs, which do not utilize leverage on a portfolio basis, offer a high degree of transparency to ➤

After you finish reading this article, please pick up the phone and call your local Congressman and your U.S. Senator and ask for a meeting in their local district office.

An Investment for All Seasons: Non-Correlated Income Producing Equipment Investing

By Michael Ponticello, SQN Capital Management

grassroots effort to educate and inform our elected officials and staff of the importance of Section 1031 Like-Kind Exchanges. Remember there is no official legislation that will be voted on in the near term. We need to begin the education process of our elected officials and their staff about the positive attributes of the 1031 Exchange.

After you finish reading this article, please pick up the phone and call your local Congressman and your U.S. Senator and ask for a meeting in their local district office. More than likely you will get the opportunity to meet with a staff person; the staff are some of the most important people to meet. They are the ones advising the Congress member on the particulars of detailed legislation and complex issues. Your goal should be to begin a discussion with your elected official, and more importantly, to become a resource to them on the issue. As previously mentioned, our national trade associations are funding studies whose results will be to enlighten the corridors of Washington. For further information go to the Real Estate Roundtable website at www.rer.org or to the Federation of Exchange Accommodators website at www.1031taxreform.com. There you can send a letter to your legislators with the click of a mouse.

During the Revolutionary War, Benjamin Franklin said, “If we do not hang together, we shall surely hang separately!” This couldn’t be more to the point. All of us who work in the real estate industry and use the economic development tool of the Section 1031 Like-Kind Exchange plus those other industries which use the 1031 Exchange (e.g., large equipment companies like airlines, truckers and railroads, farmers buying a new John Deere Tractor, and on and on) must come together. The Like-Kind Exchange has been helping to grow the American Economy since 1921. Congress and the President should not disrupt an important tax incentive that has such a positive impact on America! ▲

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investors, with at least quarterly reports from the managers providing background on each of the investments.

Non-correlated income producing equipment investing thrives in strong business cycles as well as in periods without growth, and in contracting economic times.

In expanding markets, enterprises tend to acquire more business-essential assets or equipment in order to grow their businesses. This increases opportunities for funds that make such investments.

In periods without growth or in contracting economies, businesses continue to require revenue-producing assets and equipment, and leasing or financing them provides a great cash flow management solution. Additionally, during depressed economic conditions, residual values increase as a result of businesses holding onto assets and equipment longer by way of lease extensions.

Consider a de-icer at an airport: the value of that equipment is unaffected by the financial strength of the carrier that rolls up to the gate, or even the number of people aboard the flight. The investment thesis is simply that people will continue to fly and that airports will

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continue to exist. In downward cycles of the airline industry, this equipment will stay in place longer because the cost of replacing it is greater than continuing to lease it, and there is no ability to function without it.

A similar example would be an MRI machine in a hospital: healthcare needs are not driven by economic conditions. Hospitals do not run MRI machines as a profit center, but rather as an essential part of providing core medical services. As a matter of fact, if increased insurance costs lead to a reduction in the number of scans being performed, the hospital still has to maintain the equipment; but, the lower utilization means longer economic life, and higher secondary market value.

For these reasons, the performance of funds that invest in business-essential, revenue-producing assets and equipment does not rely on trends, market moves, or any other condition to occur to be successful.

Each investment has a contractually obligated, non-variable income stream with a back-end that can be adjusted as a hedge against inflation. â–˛

REISA News & Events

The following pages will update you on REISA Board elections and REISA Foundation news, as well as the upcoming Annual Conference. ➤

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REISA Foundation News The REISA Foundation recently donated $3,500 in scholarship money to Utah Valley University’s (UVU) Personal Financial Planning (PFP) bachelor’s program. The check was presented to Timi Jorgensen, President of the Personal Financial Planning Student Association, by REISA member Craig M. Porter Rollins of LJCooper Wealth Advisors.

REISA Board Nominations and Elections

Setting Yourself Apart Through REISA

The REISA Nomination and Election Committee is seeking nominations for the five open Board of Directors seats. New Directors will serve a two-year term beginning January 1, 2015.

By Brandon Balkman Orchard Securities

Criteria for Board of Director Nominees: Time Commitment. All REISA board seat terms begin January 1, 2015. At a minimum, anyone wishing to be considered for nomination should be willing to (i) attend REISA’s strategic planning meeting and board meeting in January 2015, (ii) participate in the very occasional conference calls as situations arise, and (iii) attend the quarterly in-person board meeting immediately preceding the REISA Conference, Symposium and Forum.

Diversification. Only one representative from a company may hold a board seat at the same time.

Good Standing. Nominees must be members in good standing (i.e., dues and all other financial obligations are paid) with REISA and in the appropriate membership category, defined as the class relevant to their primary business activity.

The presentation took place at the program’s annual awards ceremony on April 24. Porter Rollins was also named the new chairman of the program’s board of advisors.

“One of the primary objectives at UVU is student success,” said Marc Archambault, UVU’s Vice President, Development and Alumni. “Your commitment to help the University provide meaningful and educational experiences to students is key to that goal. Your donation will have a positive influence on students, many of whom would be unable to attend without this vital lifeline.”

The REISA Foundation is a registered 501(c)3 not-forprofit which assists with scholarships and special projects to grow the study and appreciation of the alternative and direct investment space. To achieve this mission, the Foundation specifically supports educational organizations that provide programs to support students in their studies related to our field, and appearances at functions by government officials as a part of the ongoing education of members and the public. ▲

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Candidates who do not meet all of the above criteria will not be considered.

Please note that a nomination does not guarantee placement on the final ballot. The REISA Election Committee will select qualified nominees to the final slate based on the criteria listed above, creating a balanced representation of all membership categories (Affiliate, Associate, Sponsor).

Members of the Committee will notify each nominee of their status prior to the final slate being released.

Nominations will be open through the month of September, and the election will take place during the month of October.

Any REISA member may nominate up to three individuals, including him or herself. The Board of Directors is elected by REISA members, with each REISA member organization or firm allowed a maximum of three voting members. ▲

Why attend REISA conferences? It is a legitimate and important question to ask, given that there is a veritable cornucopia of events dedicated to addressing critical issues in our industry from a range of perspectives. More importantly, the costs associated with attending, including travel, lodging, and conference registration, not to mention the investment of time, make the decision to attend any event a significant one.

While criteria for attending specific events will vary, I see 11 solid reasons why you should commit to attending one or more REISA conferences per year related to sustainability as part of a career and professional development program. Here’s a summary of those reasons: 1. Learn about key issues, changes, and news in the industry as a whole (and your area of interest in particular).

2. Utilize REISA’s early warning system and gain advice on how to deal with potential issues.

3. Meet people and organizations addressing these same key issues.

4. Meet people in person with whom you’ve established a relationship.

5. Forge partnerships with colleagues who address key common issues/concerns.

6. Initiate relationships with others that you can continue following the event.

Many financial services firms provide a solution for only a single issue, but the majority of advisors that participate at REISA provide a holistic approach that integrates all of the major areas that impact a client’s wealth, particularly in alternative investments.

7. Learn about job, project and other work-based possibilities.

8. Gain insight into the experiences of others who face challenges similar to yours.

9. Learn about resources relevant to your area(s) of interest.

10. Generate ideas for articles, books, and/or other media that you might produce to address key issues in your field and in the process establish yourself as a valuable resource for others.

11. Demonstrate your commitment to the profession and organization sponsoring the conference.

End Game Many financial services firms provide a solution for only a single issue, but the majority of advisors that participate at REISA provide a holistic approach that integrates all of the major areas that impact a client’s wealth, particularly in alternative investments. REISA’s active reps set themselves apart from the competition.

Clients of these firms tend to save a little more on taxes, invest a little more wisely, pay a little less for their insurance and investments, plan a little better for their future, and spend a little more time deciding what they really want out of life. All these “little mores” add up to something remarkable. ▲

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REISA Annual Conference & Trade Show

Where businesses grow and deals are made. Designed for all industry professionals who sponsor, analyze, market, distribute or sell alternative investments.

More than 50 educational seminars will be offered, including an agenda track designed just for you.

Agenda highlights & tracks include: • Alternative Structures • Oil & Gas

New this year!

• REITs

REISA

Golf Outing

• Legislative & Regulatory

Sunday September 14

• 1031s

September 14-16 Caesars Palace, Las Vegas

• Due Diligence

Revere Golf Club 2600 Hampton Road Henderson, Nevada 89052

• Marketing/Technology • Emerging Structures • Sponsor “Shark Tank” • Market Update with Robert A. Stanger & Co. and BlueVault Partners

FEATURED CLOSING KEYNOTE SPEAKER

6:45am Registration and range opens; breakfast available 7:30am Shotgun start (scramble format) Golf fees*: $199 per person $699 per foursome

Terry Bradshaw

Four-Time Super Bowl Champion Two-Time Super Bowl MVP Pro Football Hall of Fame Inductee

Fees include:

• Breakfast and lunch • Greens fees and cart fees • Practice range balls • GPS unit on each cart • Bottled water and golf tees • Bag handling To register and for more information, go to

reisa.org

All proceeds will go to the REISA Foundation, which benefits collegiate scholarships. *A portion of your contribution will be tax deductible. The purchaser will receive a Disclosure Statement regarding the tax deductible portion of your donation by years end.

Two Meridian Plaza 10401 North Meridian Street Suite 202 Indianapolis, IN 46290

THE

SAVE DATE the

2015 REISA

SPRING SYMPOSIUM March 22-24 Hyatt Regency New Orleans

reisa.org