BENEFITS OF A REAL ESTATE DEVELOPER GOING PUBLIC ON THE OTC MARKET

Mr. Steven Mueller, Senior Management Partner, Syndicate Legal Services

BENEFITS OF A REAL ESTATE DEVELOPER GOING PUBLIC ON THE OTC MARKET

Going public on the Over-the-Counter Market, commonly referred to as the “OTC Market,” can offer real estate developers an alternative path to raising capital and achieving growth compared to listing on major exchanges like the NYSE or NASDAQ.

The OTC market, which operates through a decentralized dealer network, allows companies to trade securities without the stringent requirements of major exchanges.

In this video, I outline the key benefits of a real estate developer choosing to go public on the OTC Market, drawing on general financial principles and more than twenty-five years of capital markets experience. I’ll also address the context of real estate development and critically evaluate the advantages.

FIRST, KEY BENEFITS OF GOING PUBLIC ON THE OTC MARKET FOR A REAL ESTATE DEVELOPER

·       Access to Capital for Growth:

o   Benefit: Going public on the OTC market allows real estate developers to raise capital by issuing shares to a broader pool of investors. This capital can fund land acquisition, construction, or property redevelopment, which are capital-intensive activities critical to a developer’s operations.

o   Real Estate Context: Real estate development often involves high upfront costs and long project timelines. OTC markets provide an avenue to secure funds without the immediate pressure of meeting major exchange listing requirements, enabling developers to finance projects like multifamily housing, commercial buildings, or mixed-use developments.

o   Example: A developer could use OTC-raised funds to acquire undervalued land in a high-growth area, avoiding reliance on costly bank loans or private investors.

·       Lower Regulatory and Listing Requirements:

o   Benefit: OTC markets, particularly tiers like OTCQB and OTC Pink, have less stringent financial and reporting requirements compared to major exchanges. For instance, OTC Pink companies are not required to register with the SEC or provide extensive financial disclosures, reducing compliance costs and administrative burdens.

o   Real Estate Context: Smaller or early-stage developers, who may not meet the high financial standards or governance requirements of NASDAQ, can still access public markets. This is particularly useful for developers with limited operating history or those managing niche projects, such as boutique residential or specialized commercial properties.

o   Critical Note: While lower regulation reduces costs, it can increase risk for investors due to less transparency, potentially affecting the developer’s reputation or stock liquidity. I always encourage my OTC Pink Developers to balance cost savings with maintaining investor confidence through voluntary disclosures.

·       Flexibility in Transaction Terms:

o   Benefit: OTC markets offer greater flexibility in structuring deals, as transactions are negotiated directly between buyers and sellers through broker-dealers. This allows developers to tailor share offerings to specific investor groups, such as institutional investors or high-net-worth individuals.

o   Real Estate Context: Developers can structure offerings to attract investors interested in real estate’s long-term value appreciation or stable cash flows, such as from rental properties. For example, a developer could issue preferred shares with fixed dividends tied to rental income, appealing to income-focused OTC investors.

o   Example: A developer building a portfolio of industrial warehouses could offer OTC shares with terms that prioritize dividend payouts, aligning with investor demand for steady returns.

·       Privacy and Controlled Exposure:

o   Benefit: OTC markets allow companies to maintain a degree of privacy compared to major exchanges, as they can limit public disclosures and market their securities to a select group of investors. This is particularly appealing for developers who want to avoid publicizing sensitive business details.

o   Real Estate Context: Developers often deal with confidential tenant relationships or strategic land acquisitions. By going public on the OTC market, they can raise capital discreetly without exposing project details that could alert competitors or affect tenant negotiations, such as a sale-leaseback deal with a major retailer.

o   Example: A developer planning a high-profile mixed-use project might prefer OTC listing to avoid public scrutiny from competitors or local opposition, such as NIMBY groups, as noted in challenges to real estate development.

·       Access to Alternative Investors:

o   Benefit: OTC markets provide access to a diverse investor base, including those seeking undervalued or speculative opportunities, such as smaller companies or microcap stocks. This can include international investors or those looking for niche real estate plays.

o   Real Estate Context: Developers can attract investors interested in high-risk, high-reward real estate ventures, such as urban redevelopment or emerging market projects. This is particularly valuable in a competitive environment where traditional financing, such as those associated with bank loans, is constrained due to high interest rates or the “denominator effect,” where institutional investors reduce real estate allocations due to public-equity portfolio declines.

o   Example: A developer focusing on sustainable or activity-friendly communities, such as walkable neighborhoods, could appeal to ESG-focused OTC investors, leveraging trends in environmentally conscious investing.

·       Testing the Market for Future Growth:

o   Benefit: Listing on the OTC market can serve as a steppingstone to gauge investor interest and build a public track record, potentially paving the way for a future uplisting to a major exchange like NASDAQ or NYSE.

o   Real Estate Context: Developers can use an OTC listing to establish credibility with investors by demonstrating successful project execution, such as delivering a profitable commercial property. This can enhance their valuation multiples when transitioning to a larger exchange.

o   Example: A regional developer with a small portfolio of multifamily properties could go public on OTCQB to raise initial capital, refine operations, and later uplist to NASDAQ to fund national expansion.

·       Potential for Lower Costs Compared to Major Exchanges:

o   Benefit: The costs of going public on the OTC market (e.g., legal, accounting, and listing fees) are generally lower than those for major exchanges, which require extensive audits and compliance with stricter regulations.

o   Real Estate Context: Developers, who often face high project costs and cost overruns, such as 10% to 20% buffers recommended for budgets, benefit from reduced capital-raising expenses. This allows more funds to be allocated to core activities like site selection or construction.

o   Critical Note: While initial costs are lower, developers must consider ongoing costs of maintaining investor relations and ensuring enough liquidity to avoid wide bid-ask spreads, which can deter investors.

SECOND, REAL ESTATE DEVELOPER CONTEXT

·       Real estate developers differ from REITs or property management firms, as they focus on building or renovating properties for sale or lease, often taking on higher risks but also higher potential rewards. Going public on the OTC market aligns with their need for flexible, cost-effective capital to manage these risks. For example:

o   Project Financing: Developers can use OTC capital to bridge financing gaps for projects that banks or private investors might not fund due to high risk, such as speculative developments in emerging markets.

o   Portfolio Expansion: OTC listings allow developers to scale operations, such as acquiring multiple sites for a master-planned community, without the immediate pressure of major exchange compliance.

o   Strategic Timing: In a high-interest-rate environment, such as 2023–2025 where rates were above 7%, OTC markets offer a way to raise equity capital when debt financing is expensive.

THIRD, EXAMPLES AND APPLICATIONS

·       Small Developer Scenario: A regional developer specializing in affordable housing could list on the OTC PINK or OTCQB to raise $5–10 million for a new project, offering shares to local investors familiar with the market. The lower regulatory burden allows them to focus on project execution rather than SEC filings.

·       Niche Market Developer: A developer focusing on sustainable commercial properties, such as net-zero office buildings, could attract ESG investors on the OTC Markets, leveraging the market’s flexibility to offer customized share terms tied to project milestones.

·       Transition Strategy: A mid-sized developer with a growing portfolio might use an OTC listing to establish a public track record, aiming to uplist to NASDAQ after proving consistent project profitability and attracting institutional investors.

CONCLUSION

For real estate developers, going public on the OTC market offers significant benefits, including access to capital, lower regulatory hurdles, flexibility in deal structuring, privacy, and the ability to target alternative investors. These advantages are particularly relevant for smaller or early-stage developers who need cost-effective financing to compete in a capital-intensive industry. However, developers must carefully manage the risks of lower liquidity, potential investor skepticism, and market volatility. By leveraging OTC markets strategically, developers can fund projects, build credibility, and position themselves for future growth, potentially transitioning to major exchanges as their operations scale.