Tax Reform Act of '86 has revolutionized real estate industry.

Over the next 10 to 15 years, the real estate market will look more like today's corporate market. Real estate companies will prevail with over half of real estate assets in public vehicles (REITs), with the balance in private corporate vehicles, opportunity funds, and private holdings by institutions.

The single key factor responsible for the explosive growth of real estate companies stems from the Tax Reform Act of 1986. Prior to the passing of the Tax Reform Act of 1986, most real estate was owned by limited partnerships because of the overwhelming tax benefits of such structures. After 1986, those reasons disappeared, making it more advantageous for real estate to be held in a corporate form like any other businesses. While other industries embraced this change in the early 1900's - the real estate industry has only recently started this transformation.

Experience leads us to believe that in the future, REITs and private real estate companies will grow at an even faster pace than history suggests. Now that this corporatization of real estate, both in public and private forms, has caught on and is more accepted, more investors will take a chance with these investments and the big players will step up to the plate. We can therefore expect to see increased activity by pension funds, non-REIT mutual funds and off-shore investors. As real estate operating companies typically must distribute all of their net income, and they operate in a capital intensive business, growth must be funded externally. Sources have been, and will continue to be, issuances of stock and other public debt and equity securities, private placement transactions (like from Five Arrows Realty Securities LLC, an investment vehicle through which institutional capital may participate in real estate investment), through public/private joint ventures, and through mortgage financings.

There are challenges to this growth, mostly related to management skills, because real estate has never been held in this format before, nor on such a large scale. Real estate professionals are charting new territory, and management teams will be confronted with unpredictable and new organizational challenges which will have to be addressed. Another key challenge relates to an issue that has been a big downfall for REITs in the past - REITs have traditionally prospered in the up cycle but fared less successfully in file down cycle. How management handles the cyclical nature of their real estate, as well as the capital markets, will be a true test of future growth.

The real estate industry is undergoing an irreversible historic shift to corporate organizations. Survivors will need real estate savvy, organizational management skills and capital markets expertise.