The Lightstone Group has launched The Lightstone Value Plus, a non-traded public real estate investment trust (REIT), with a $300 million offering aimed at small investors and distributed by Manhattan-based Lightstone Securities LLC. After seven years, Lightstone expects to take the REIT public.

Chairman and CEO David Lichtenstein committed an initial $30 million investment, or 10 percent of the total fund, to cover set-up costs and ensure 100 percent of investments go into property, according to Lightstone Securities president and CEO Ed Devereau. This is unusual in that it offers investors a “no front-end load” deal, he says, noting that with typical REIT start-up and acquisition fees, only 80 percent to 85 percent of an investment goes into the ground.

Lightstone, a private equity real estate firm in Lakewood, N.J., has set a first-year benchmark of 7 percent return on investment (ROI), with the sponsor making nothing until investors are paid. The trade-off is a seven- to 10-year hold period, a bit longer than most non-publicly traded REITs require investors to hold shares before selling. The hold period is longer because higher dividend payments limit a REIT's liquidity, Devereau explains, noting that the average first-year dividend for this type of REIT is 6 percent.

He points out, however, that Lightstone ROI is expected to grow to at least 12 percent over the hold period, after which the REIT plans to go public, though it could take up to 10 years. The timing depends on the health of the market and growth in value of the Lightstone's dividends compared with competitors.

A common drawback to non-traded REITs is that investor money is usually tied up for five to 10 years, and sponsors get paid before investors. A few non-traded REITS have attempted to set themselves apart from the others by offering investors better terms. Inland Western set up a share repurchase plan based on how many years the investor holds, but the program can be terminated for any reason by the sponsor.

The Lightstone REIT is designed to motivate small investors, with a minimum investment of $1,000, or $3,000 for transfers from tax-deferred accounts. Shares are priced at $10. About $3 million has been raised so far.

The REIT plans to focus on retail properties with upside potential located in secondary markets, says Devereau. Its first buy is Belz Factory Outlet World in St. Augustine, Fla. Lightstone paid $28 million for the 200,000-square-foot center. The sales price represented a 9.3 percent capitalization rate. The average cap for comparable retail in the area is 8 percent, according to Devereau. The deal is expected to close in April.