A real estate trust is an essential tool for any investor or real estate developer. Although the concept may seem complex for those unfamiliar with the legal world, it offers a solution for both those wishing to finance their developments—whether it's a complex of buildings or an individual apartment—and those looking to secure their investment. But before we continue…
What is a trust? When is it considered a real estate trust?
A trust is simply a contract where one person (the trustor) transfers the ownership of an asset (the trust property) to another person (the trustee). The trustee is responsible for managing or administering the asset on behalf of the trustor or a third party, depending on the agreement. In the case of real estate trusts, the asset transferred could be a piece of land, a sum of money designated for construction, or even an already started construction project, among other options. In other words, it involves real estate, hence the term real estate trust.
The key feature of this tool is that it creates a “separate estate” distinct from the contracting parties. This means that the transferred asset (in this case, the property) cannot be used to pay the trustee's debts, providing great legal security for all parties involved.
What is included in a real estate trust?
In this type of trust, the parties are:
Trustor: The person who contributes assets to the trust, such as money, land, or any other asset.
Trust Property: The asset contributed by the trustor. For example, the trustor may contribute land and money, and the trustee could be a construction company responsible for building a building. Once the apartments are sold, the profits are distributed among the beneficiaries.
Trustee: As mentioned earlier, the trustee is the entity or person who manages these assets. In this case, it could be a development company that receives the money and builds the property.
Beneficiary: The person or entity that benefits from the project. This could be the trustor or a third party. The benefit could be in the form of real estate or money after the sale of the units, among other possibilities.
Why choose a real estate trust?
Real estate trusts are very common in the development of gated communities, apartment buildings, or shopping centers.
Real estate trusts offer both parties in a real estate transaction numerous benefits. For example, in a real estate investment case, the advantages are:
For the investor: It provides security, as the “separate estate” protects the assets contributed to the trust from the financial problems or improper use by the trustee. It also allows participation in projects that might otherwise be too large for their individual investment, such as a shopping center or rental apartments through Real Estate Crowdfunding, which we will discuss in another article.
For the developer: It helps raise funds without the need for debt, whether from future property owners or trustors seeking profitability from the sale of the property. It allows the developer to keep the management of construction resources separate from the company's funds. It also aids in attracting investors by providing transparency and security offered by this type of contract.
A bonus: Some business ideas with real estate trusts
A real estate trust opens up countless business ideas, but to inspire some brainstorming, here are a few examples:
Gated communities or condominiums: Those hectares you see on the outskirts of the city, where you'd love to have your neighborhood, could be developed or invested in with the help of this type of contract.
Shopping centers: Creating a shopping center is a huge investment that many cannot face alone. However, there is the possibility of being part of a real estate trust with a development company that handles construction and operations, allowing you to obtain benefits.
Eco-friendly homes: Perhaps you have land with beautiful trees that you don't want to be cut down but are interested in generating profit from the property. In this case, you could partner with a company that develops eco-friendly homes, contribute your land to a real estate trust, and later enjoy the benefits of rental or sales while keeping nature as intact as possible.
Real Estate Crowdfunding: Do you see a commercial opportunity but lack the capital needed? With this innovative business model, you can pool small amounts from dozens of investors.
Conclusion
Real estate trusts are an excellent tool for the development of any type of real estate project. They offer legal security, versatility, and the ability to mobilize large investments. Whether you're looking to make better investments or develop a real estate business, you cannot overlook this legal structure, which could be the key to your success.
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