Nico Review -- Hyperlocal REIT Investing for Everyone

Overview

This Nico Review will help you learn more about Nico's investment offerings, including how the alternative investments on Nico are structured, and what your potential returns might be. You can read more about the criteria we use to review investment platforms here.

Nico (short for “Neighborhood Investment Company”) was founded in 2018 by Morgan Stanley alum John Chaffetz and Max Levine, formerly the CFO at Storage Deluxe. Nico claims to be the “world’s first neighborhood REIT”, calling their approach the “Neighborhood Model”. Nico’s first offering is a REIT that currently owns three commercial properties in the Echo Park neighborhood of Los Angeles. Notably the REIT is registered as a Maryland Public Benefit Corporation (also known as a “B Corp”), with the stated intention of favoring local investors interested in having a direct stake in the community:

The Neighborhood Model allows Local Residents in our Neighborhood the ability to own an equity interest in us alongside other non-local investors. The Neighborhood Model allows Local Residents to “build equity while renting” and benefit as long-term participants in the ownership of our Company. This unique model allows us to leverage the fundamental appeal of vibrant neighborhoods, strengthen communities and share economic benefit more broadly, which we believe has the potential to generate fundamentally stronger investment and social outcomes over the long term.

Types of investments Nico offers

Nico’s first Neighborhood REIT owns and operates properties in the Echo Park neighborhood of Los Angeles. Nico expects the REIT’s portfolio will grow over time as more investors provide capital, but at the time of this writing the REIT has just the 3 initial “seed” properties in the portfolio. First is a mixed use commercial building with 20 apartments and four retail stores on the ground floor. Second is a 32 unit apartment building which is connected by multiple courtyards. Last is a 28 unit apartment complex that is designed as an art deco building.

The investment strategy is described in their Offering Circular:

We intend to invest exclusively in the Neighborhood, and as a result we expect our positions to have a higher degree of geographic concentration relative to many other REITs. However, we believe that our focus on a specific market creates a unique investment opportunity. To our knowledge, there are not many, if any, traded or private REITs that allow investors to target a specific Neighborhood they believe to be attractive, and none that are specifically designed to encourage residents of that Neighborhood to participate in such investments, in our case through shares of our Class L common stock.

What do you get when investing with Nico?

Investors in the REIT offered by Nico receive common stock in a Maryland Corporation (priced at $10/share, with a minimum investment of 10 shares, or $100). The REIT in turn is the entity that actually invests in the properties (often through yet another layer of special-purpose entity). Local investors have a voice in the management of the REIT, while also having the ability to redeem shares after 6 months, while non-locals must wait at least 2 years before redeeming any of their shares.

How does Nico make money?

As with the other Reg A+ REITs, Nico emphasizes the lack of commissions typically paid to broker-dealers for traditional non-public REIT investment (which can be 10% or more). However, there are still a number of fees and incentive payments earned by Nico and its affiliated entities:

• A 2% Acquisition Fee when properties are purchased
• A 1.5% annual Asset Management Fee
• Monthly property management fees of 5% of rental income
• Additional performance fees if the annual return to shareholders exceeds 6% for a given year (of 12.5% of any such excess)

Potential returns and cashflow

Nico currently pays a quarterly dividend (though as with similar REITs, that is subject to the discretion of company management).

All REITs are required to distribute 90% of their taxable income annually to retain the favorable tax treatment REITs receive from the IRS (in short, they don’t pay income taxes as long as they distribute at least 90% of their annual income back out to shareholders). Nico advertises a targeted “10% annualized dividend”, though actual distributions and performance will of course vary with the income and performance of the underlying properties owned by the REIT (according to the national REIT association, equity REITs have an average return of 10.1% over the last 30 years). Additionally, there is a potential for additional upside from the appreciation if the properties are sold.

Breadth of offerings on Nico

As of this writing, the only investment offering on Nico is their Echo Park REIT in Los Angeles.

Regulatory framework

Nico is offering shares in a REIT under Tier 2 of SEC Reg A+, which carries with it several mandatory disclosure and reporting requirements. Prospective investors can review the full SEC offering circular here.

REITs like the one from Nico are known as “blind pool” investments, so investors are not able to opt-out of particular properties, and are relying entirely on Nico’s judgment about which properties to acquire and all the terms of the purchase, any renovation, etc. Prospective investors should also note that as is the case with a number of other real estate investment crowdfunding platforms, the REIT acquired its initial property from an affiliated company. This is not uncommon (especially as a way to have several properties owned by the REIT before opening the offering), but investors should be sure to understand the inherent potential for conflicts of interest and conflicting incentives in such transactions.

This review was first published on 25 July 2022.

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