PAVRs – PROTECTED APPRECIATION VEHICLES FOR REAL ESTATE
WHAT IS A PAVR?
The term PAVRs was orginated by ARCTRUST and is an acronym for the phrase “Protected Appreciation Vehicles for Real Estate”. PAVRs are investments that combine the safety and cash flow features of a corporate bond, with the appreciation and tax benefits inherent of real estate. PAVRs are favored investments by investors who are willing to take a slightly lower yield in exchange for more safety, transparency and reliability compared to directly investing in real estate. PAVRs also benefit from simple record keeping and tax reporting. Minimum distributions are fixed in advance and the appreciation is paid based upon rudimentary formulas that are easy to calculate. There are three primary types of PAVRs:
NET LEASE PROPERTIES
Net Lease Properties are general purpose properties leased for a long term to nationally or regionally recognized tenants with strong credit. Under the net lease structure, the tenant generally pays all expenses associated with the property and has periodic increases in rent. Due to favorable tax and balance sheet benefits, most national companies do not own their own real estate and prefer to lease the properties back to investors. The net lease structure allows the tenant to preserve their capital for the main operating business.
Participating Debt is a lending vehicle that includes a typical loan combined with participation in the cash flow and future value of a property. The participation can be completed through direct participation of the real estate or through warrants or options that can be exercised in the future. Many real estate owners prefer this structure because it is tax efficient and allows them to participate in the future appreciation of a property. Real estate owners may be unwilling to sell because they are optimistic about the future.
Preferred Equity is an equity investment into an entity or property where the investment has a priority in cash flow and capital events. Like Participating Debt, many real estate owners want to keep ownership of their property but need capital for a particular investment. Some structures do not allow new Debt to be invested so Preferred Equity can accomplish the same thing as Participating Debt but uses an equity investment instead.