LEX, a commercial real estate securities marketplace, raised $15 million in Series A funding to “take buildings public.”
Direct investment in commercial real estate typically has been reserved for the wealthy and connected. But LEX allows everyday investors to buy and sell shares of individual commercial assets for as little as $250, without required holding periods.
The startup says buyers of shares in a building have full transparency and receive the same benefits — appreciation and passive income via cash distributions from rents, among others — as the property’s sponsor, its original owner. And they can exit at any time.
“These are all stabilizing or stabilized assets, with long-term leases, cash flow and historical financials,” said CEO Drew Sterrett. “They have been de-risked.”
Of course, no real estate investment is without risk. Tenants leave, downsize, go bankrupt or just stop paying rent. Building owners miss debt payments and lenders foreclose. LEX discloses such potential outcomes in the fine print of investor documents.
Sterett noted that investors can track rent rates, tenant rollover, operational expenses and other key information on the platform.
LEX, co-founded by Sterrett with brother Dean and Jesse Daugherty, also bills itself as a “new equity recapitalization option” for building owners, who, by partnering with LEX, generate partial liquidity in individual assets while maintaining control of the property.
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The Series A, announced Wednesday, was led by the investment and options trading firm PEAK6. Khosla Ventures, MetaProp, Two Lanterns, MUFG Innovation Partners and Gaingels also participated.
Efforts to democratize commercial real estate investing go back years, beginning with the original real estate investment trust legislation in 1960. The REIT model and its offshoots — other modern investment platforms, such as Fundrise, sometimes call their products “eREITs” — facilitate indirect investment. A retail investor is buying shares in a real estate company or fund, which then puts the capital to work on investors’ behalf.
LEX takes those efforts a step further by allowing direct ownership in individual properties. It accomplishes this by way of some sophisticated accounting.
Each building is held in a limited liability company, and its listing on LEX’s trading platform — LEX is a licensed alternative trading system, or ATS, a notch below a national stock exchange — is tantamount to an IPO.
LEX securities are structured as publicly traded partnership interests, which allows for the tax benefits of real estate ownership to pass through to the individual investors. Investors receive a Schedule K-1 tax form, not a 1099, at the end of the year.
“You know how Donald Trump only paid $750 in federal taxes? That’s now available to everyone,” Sterrett said.
LEX makes money by charging sponsors a one-time placement fee at the time of an IPO, when the property is listed on the platform. It also collects an annual fee from them equal to 1 percent of the public float, or the total capital raised in the IPO. That is deducted from investors’ distributions, reducing their return.
LEX does not charge a commission on trades, and it absorbs any clearing, SEC and FINRA fees, according to its website.
The platform opened to the public in November with initial investment offerings in Portland, Maine and Harlem properties. The Manhattan site, an office property at 286 Lenox Avenue, was reportedly the first publicly traded individual commercial building in New York. The IPO for it is still underway.
LEX plans to expand its listings by about one per month, adding apartment buildings, warehouses and other property types. The platform could work for a commercial building of almost any value, Sterrett said: “It really works for properties worth a couple million dollars all the way up to — actually unlimited.”
LEX raised $4 million in a seed round in 2019.