Key Considerations for Starting a Real Estate Fund

As real estate funds continue to succeed and become more prevalent in the alternative investment industry, and with more institutional investors increasing allocations to real estate, an increasing number of aspiring portfolio managers are joining the race to launch their own real estate funds. For many successful real estate investors and syndicators with several single-asset deals under their belt, starting a real estate fund is the logical next step.

What are the benefits of launching a real estate fund?

• A ready source of equity, allowing you to act quickly as opportunities arise
• Considerable discretion over investments of the fund’s capital
• Access to larger projects
• A vehicle for diversifying your portfolio and sharing risks with outside investors/limited partners
• The potential to negotiate more favorable terms from banks and other lenders; and
• The ability to earn substantial fees on top of any returns on your investment in the fund

Before you embark on this journey, be sure that you’re prepared and that the timing is right.
The following summarizes the first steps that managers should follow to launch a real estate fund.

Define Your Business Strategy

When doing single-asset syndicated deals, you may have had a specific investment focus, or you may have been indifferent to the asset class. Starting a fund typically demands a disciplined investment strategy that focuses on a single asset class or a geographic area from which your investment strategy can’t deviate. It is important for you and your prospective investors to evaluate how well your track record aligns with the fund’s narrower investment strategy.

Outline Your Historical Performance Record

Potential investors will want to understand your relevant historical performance record before considering making an investment. Managers looking to raise capital often find a lack of a documented track record of past performance to be a roadblock. To alleviate investors’ reluctance, it would be beneficial to prepare a summary of your historical performance, including denoting such performance in marketing materials.

More sophisticated investors tend to look for the performance record to be accompanied by an independent accountant’s report. Meet with an accounting firm like Anchin, experienced in guiding start-up real estate fund managers, to understand the most cost-effective options.

Setting up Your Fund Structure

Real estate funds are generally structured as limited partnerships or limited liability companies. As a founder of the fund, you will be a general partner or managing member empowered with the right to decide the investments that make up the fund portfolio. Your investors will be limited partners who will not have the right to make any decisions on behalf of your fund or fund investments. One critical decision is whether the fund will be open- or closed-end. An open-end structure allows you to raise additional capital periodically and is attractive to investors, who can redeem their investments or make additional capital contributions over the life of the fund. Given the illiquid nature of real estate investments funds are usually closed end, which prohibits withdrawals or additional contributions over a fixed term (typically seven to ten years).

Outline Your Current Pipeline of Deals

You’ll need a steady deal flow to ensure that the fund can deploy all of the raised capital and earn a return. As discussed above, starting a fund typically requires $15-25 million of equity, which, with the use of leverage, means approximately $60-100 million in assets under management. Depending on your average deal size, the number of assets to be acquired may vary.

The Right Team

Once a business plan has been completed, you should promptly meet with external service providers and consultants, such as accountants, attorneys, and other industry specialists, who can assist you with effectively and efficiently refining and executing your business plan.

The fund manager must decide on the roles and titles of the firm’s leaders, such as the role of partner or portfolio manager as well as the establishment of a management team, including the CEO, CFO, CIO, and CCO. At launch, it may be wise to outsource some of these functions to allow you time to execute your business plan while keeping costs in check.

It’s critical to have a team of experienced advisors and service providers who understand the real estate industry and real estate funds in particular.

Such advisors and service providers include:

• A law firm to advise you on a variety of organizational and compliance issues and to draft the private placement memorandum and other offering materials.
• An accounting firm like Anchin to assist you with documenting your performance record and preparing audited financial statements, advise you on a variety of financial and accounting issues, and identify the right tax structure for the fund, which can have a significant impact on returns.
• A fund administrator to assist with accounting, investor relations and, communications.
• A property manager (unless you have your own management company).

There are many factors to consider when determining your plan for a real estate fund. The above-mentioned steps can be used as a roadmap for establishing a foundation for your real estate fund by defining your business strategy, outlining your historical performance record and setting up your fund structure. In addition, outlining your current pipeline of deals helps demonstrate that you’ll be able to deploy capital and earn a return.

For more information about what is involved in launching and operating a real estate fund, please contact a member of Anchin’s Emerging Manager Platform or your Anchin Relationship Partner.

Keep Reading – Key Considerations for Starting a Real Estate Fund – Part 2