LEX Markets offers a compelling platform for buying and selling ownership shares of commercial properties, thanks to its combination of features that promote liquidity, low minimum investments and acceptance of non-accredited investors.
This LEX Markets review covers everything you need to know about the platform, including how to get started, who it’s best for, and which alternatives you may want to consider.
LEX is a real estate investment platform that allows building owners to offer equity directly to investors in the form of individual shares of stock. These shares can be held or traded on the LEX Markets trading system and (unlike some crowd-funded real estate platforms) there’s no minimum holding period. LEX Markets is worth a look for experienced real estate investors who know how to properly value projects and who are looking for ways to diversify their portfolio with commercial property.
- Low investment minimum of $250.
- Offers the potential for liquidity.
- Investors are issued a K-1 rather than a 1099, which allows for tax benefits such as amortization and depreciation.
- Only a limited number of properties are available.
- Actual liquidity depends on your ability to sell shares.
- There is no set dividend disbursement schedule.
LEX Markets: The Basics
LEX Markets offers a new way to invest in commercial real estate that turns properties into tradable securities. All U.S. investors can participate on the LEX Markets real estate securities platform.
Owners of commercial buildings use the LEX marketplace to sell equity in their properties as a way to raise capital without relinquishing control. Share ownership falls under a partnership structure, meaning that investors sit side-by-side with the property owner/sponsor.
LEX solves the “barrier to entry” problem by allowing non-accredited investors to buy and sell commercial real estate like stocks on the LEX Markets platform. Though, there are significant differences, which we’ll cover below.
LEX appeals to investors who would like to diversify their portfolios with commercial real estate without taking on the commitments of owning, managing and maintaining properties.
Founded in 2019 by Drew Sterrett and Jesse Daughtery, LEX obtained $4 million in seed funding for its platform launch before acquiring $15 million in Series A funding in January of 2022. While it’s hard to pin down user specifics, LEX claims to have more than 20,000 investors.
Types of Properties on LEX
LEX is for commercial properties. When customizing portfolios, investors will find a mix of institutional-quality commercial real estate properties.
That said, there is a very limited number of properties available. Currently, just two potential projects are available on the platform to buy into, with another coming soon.
LEX opens access to shares of properties issued by commercial real estate owners.
Each property has been vetted and selected by the LEX team based on its expected risk and return profile. Returns, however, are not guaranteed.
LEX doesn’t maintain equity positions in holdings on the platform. Instead, the existing owner maintains a large percentage stake in the holding, along with those who purchase shares through LEX.
Properties available for trade can be viewed through the LEX website and app.
Once LEX lists a property, the property then opens for trading. At the time of purchase, LEX users are required to use limit orders. This means setting both the maximum price a user is willing to pay and the minimum price they are willing to sell at.
An order is good to go if the LEX app finds an opposite-side order that either matches or overlaps with a user’s limit price. This activates a trade. If an opposite-side order isn’t found, the LEX app will park the order until an opposite-side order arrives, until a user-specified date, or until cancellation by the shareholder.
LEX’s real estate team uses a robust underwriting process to determine fair market value for each property. Equity is then divided by 250 to determine how many $250 shares will be issued.
To use an example, a property that is issuing $20 million of equity would issue 80,000 shares (20,000,000/250).
While the initial price per share is fixed on LEX, share quantity varies based on both market value and the percentage of the building being sold.
Once LEX closes an initial offering, share value is determined by the market.
LEX Markets Vetting Process
Getting a read on LEX’s success is hard due to the newness of the platform. The lack of properties available through LEX at any given time can raise eyebrows for people who are familiar with the robust offerings on other real estate investing platforms.
The concern over the lack of properties visible on LEX requires addressing.
LEX explains that its vetting process results in just 1% of applicants actually being invited to list their properties on the platform. A property only gets listed on LEX if it has a history of positive cash flow and at least a $10 million asset size.
Here’s how LEX performs due diligence before accepting a property:
- Thoroughly reviews and analyzes a property’s financial records.
- Physically inspects each property.
- Commissions third-party reports by engineers, appraisers and title companies.
- Conducts interviews with building management, leasing agents and maintenance workers.
- Conducts background checks of key property personnel.
- Conducts a committee review utilizing the expertise of experienced real estate professionals.
How Do You Make Money With LEX Markets?
You can make money in one of three ways on LEX Markets:
- Purchase shares in a specific property and sell them later at a higher price.
- Through distributions from the property owner.
- Through proceeds from the sale of a property.
For tax purposes, since LEX offerings are structured as publicly traded partnerships (PTP), only a portion of the cash distributed to investors is categorized as ordinary income.
The Schedule K-1 sent to every LEX investor at the start of each year details which portion of cash received in the prior year qualifies as ordinary income.
Shareholders receive quarterly distributions from tenant-paid rent. While distributions aren’t guaranteed, LEX requires building owners to pay distributions to shareholders at an equal rate whenever they pay themselves distributions.
By allowing owners of commercial properties who raise capital through LEX to retain majority equity ownership, it’s assured that property owners have skin in the game.
The unpredictability of distributions on LEX could make some investors skittish. As stated above, investors get paid when owners get paid. Ideally, this is quarterly, but there’s no guarantee.
LEX doesn’t have an established formula for how and when distributions are shared. Distributions are actually calculated at the discretion of property owners in order to provide them with the flexibility needed to keep assets in operational condition.
Some investors are likely to be turned off right there.
However, it’s important to remember that property owners are incentivized by LEX’s requirement that they can only be paid when they pay their investors. Some investors are happy to risk the unpredictability of payments for the edge that comes from owning a stake in a property that’s being managed directly by the person with the most to “win and lose” in the scenario.
Generally, LEX distributions are derived from a property’s net cash flow after expenses and debt payments have been covered. Cash distributions are placed directly in investor brokerage accounts.
LEX investors are also counting on appreciation. While LEX investors don’t have crystal balls directing them to the right properties, they are relying on LEX’s ability to identify income-generating properties to account for appreciation.
Real estate’s ability to keep up with inflation makes it a popular option among people seeking to diversify away from stocks. Ultimately, each investor must put in the time and research for properties offered through LEX to decide if they believe appreciation is likely based on location, usage and market trends. In this regard, betting on appreciation through LEX works the same as any property investment.
Costs and Fees
Minimum investments start at $250. However, shares fluctuate based on supply and demand. The 0.25% quarterly fee works out to just 1% in annual fees. No commissions or trading fees apply.
How Does LEX Make Money?
The 1% annual management fee goes to LEX, not the building owner. Building owners use LEX because they receive the proceeds of the IPO. Proceeds of the IPO go directly to the property owner themselves, which can be used at their discretion and for outside projects.
Liquidity
Anyone in the United States over the age of 18 can set up an account on LEX. Users are free to buy and sell shares on the LEX platform as they please.
It’s important to remember that the convenience of the LEX business model doesn’t erase risk.
Liquidity is ultimately determined by the market. Investors have to find someone to sell shares to if they want to get out of a position. If demand for a property plummets, an investor could get into a scenario of either being stuck with shares or selling at a discount.
Liquidity is not guaranteed with LEX. If an investor is unable to trade out of a position, shares can still be liquidated if the property is ultimately sold or refinanced. However, there is no guarantee that any property will be sold or refinanced at any point.
One aspect of the LEX platform is LEX’s distance from issuers of properties. Once LEX shares are purchased, they can be owned by the investor forever. That means that shares can still be sold using other brokers if LEX goes out of business.
LEX vs. Alternatives
Here’s a glance at how LEX Markets stacks up against other crowdsourced real estate platforms.
LEX vs. Fundrise
The big difference between LEX and Fundrise is that LEX shares are tradable. While you can use the LEX alternative trading system (ATS) to unload shares if the need arises, Fundrise is targeted towards longer-term investments.
An asset management fee of 0.85%, advisory fee of 0.15%, and other fees apply on Fundrise. According to Fundrise’s own data for 2017 through 2021, annual client returns range from 7.31% to 22.9%.
Fundrise does have a few things in common with LEX. First, it’s open to both accredited and non-accredited investors. It also has a low minimum investment that starts at $10 for a Starter Portfolio before jumping to $1,000 for the Basic Plan. However, investment minimums go all the way up to $100,000 for meatier opportunities.
Our consensus on Fundrise is that it can be a good option for someone with the time and resources to perform due diligence. It’s also great for someone who wants to park their resources for a long-term investment.
See our Fundrise review to learn more.
LEX vs. CrowdStreet
CrowdStreet has generated $3.3 billion in funding since 2014. The platform has also realized 115 out of 647 deals since its launch.
Like LEX, CrowdStreet makes investors money through both dividends and capital appreciation. Unlike LEX, CrowdStreet offers investment opportunities for both commercial and residential properties. The platform is geared for long-term investments lasting three to 10 years. CrowdStreet claims an 18.7% internal rate of return (IRR).
CrowdStreet investors purchase partial interest in either commercial properties or personal-property funds. CrowdStreet’s investment option mimics the way REITS offer specialized investment funds with multiple properties held by multiple sponsors. Investors with at least $250,000 to invest are provided custom portfolios with advisors.
CrowdStreet is only open to accredited investors with account minimums of $25,000. Fees range from 0.50% to 2.5%. Specific investment projects often have their own fees.
See our CrowdStreet review to learn more.
LEX vs. REITs
REITs are companies that own or operate properties using a structure that provides investors with easy access to real estate through collective investing. REITs can either be publicly traded or non-traded REITs.
REITs offer much greater diversification than what you get with LEX. The market cap of one of the most popular REITs, the Vanguard Real Estate Index Fund, is over $20 billion. Due to its size, prices of REITs, in addition to distributions, are more stable than investing directly into individual properties.
What makes LEX different from REITs is what you’re purchasing. LEX allows you to own part of individual commercial real estate buildings instead of buying into groups of buildings the way you would with REITs. As a result, your investment is tied to a single asset’s cash flow. This increases potential returns while also increasing potential risk.
Lastly, publicly traded REITs are significantly more liquid than LEX securities. However, their price movements often correlate heavily with the stock market.
LEX Markets Review: Our Verdict
LEX Markets invites non-accredited investors to buy, own and sell shares of commercial real estate projects. The immediate draw of LEX is its options for liquidity. Unlike other crowdsourced real estate platforms, LEX doesn’t have lock-in policies for holding on to investments. However, liquidity is ultimately determined by your ability to unload ownership. Liquidity is not guaranteed with LEX.
The lack of guaranteed distributions could make LEX frustrating for some investors. While property owners are required to pay investors when they get paid, this does not occur on a set schedule.
Investors are relying on the fact that the majority-ownership status of the owner provides the incentive necessary for a property to generate profits. Of course, this partnership structure allows the tax-deferred benefits of owning commercial real estate to pass through to investors.
Overall, Lex Markets is a unique platform that’s still very new compared to other crowdsourced real estate options. This business model has potential, but still has yet to prove itself over the long-term.
Potential investors are encouraged to consult with professional tax, legal, and financial advisors before making any investment into a securities offering. This investment may not be suitable for all investors. Distributions and liquidity not guaranteed. Property performance and performance of property tenants not guaranteed. Diversification does not eliminate the risk of experiencing investment loss.
All investment services are offered by LEX Markets LLC, Member FINRA/SIPC.
