Magazine article Journal of Property Management

Anatomy of a Real Estate Fund

Magazine article Journal of Property Management

Anatomy of a Real Estate Fund

Article excerpt

AN INSIDE-OUT LOOK AT A COMPLICATED STRUCTURE

SO, a new opportunity has come your way: your firm just landed a new property management account. The property is owned by a real estate fund and you've never managed for a real estate fund before. You want to understand exactly what one is and how managing for one is different than managing for other owners.

In many ways, managing a property for a real estate fund is just like managing property for any other owner: The real estate fund manager needs to have a clear understanding of the fund's goals and objectives for the property and its ability to provide cash for the property's operations, planned renovations or correction of deferred maintenance. Allocating funding for tenant improvement costs or leasing commission expenses is essential as is having an exit strategy for the property.

Fund Managers: the Heart of the Operation

The fund manager serves as the general partner or man ? aging member of the fund and makes all investment decisions on its behalf. In most cases, fund managers are real estate companies with years of experience developing and owning their own portfolios ? -rather than third party real estate management companies-that have gained the trust of investors who wish to invest in real estate with ? out the headaches of owning property directly. The fund manager oversees the fund's operations-including all property acquisition, operations and disposition decision making for the fund-without the involvement from the investors; the fund manager typically receives an annual fee of 1.5 to 2 percent of the fund's investor commitments. If the fund is profitable, the fund manager also receives an incentive fee usually consisting of 20 percent of the profits of the fund, after the investors have received a return of their investments on top of their pre-designated return.

Similar to a mutual fund for stocks or bonds, a real estate fund has a group of investors who pool their money, which is then invested by an experienced fund manager into a portfolio of real estate properties with the intent of making money for each of the investors as well as for the fund manager.

Perhaps the most important differences between a mutual fund and a real estate fund are the requirements for who can invest and the amount of money being invest ? ed. While mutual funds are broadly marketed to a large number of investors and individuals who typically invest a fairly small amount of money, real estate funds are nar ? rowly marketed to so-called qualified investors ? -includ ? ing insurance companies, pension funds, foundations and high net-worth individuals-and such investments are large, ranging from millions to tens of millions of dollars.

Recognizing that your client is, indeed, a real estate fund can be tricky because the fund may not have the words "real estate fund" as part of its name. However, it is helpful to know that a real estate fund may be legally organized as a limited liability company (LLC), a limited partnership (LP) or even a private real estate investment trust (REIT).

The Lifecycle of Closed- and Open-Ended Funds

Real estate funds can be either closed- or open-ended. Closed-ended funds, which typically have a limited fund life of seven to 10 years (and the option to extend fund life by one, two or even three additional years) have a maximum number of investors and are limited to raising a maximum investment amount for the fund. Open-ended funds do not have these limitations, and may continue to accept new or additional investor commitments during their unlimited life. Many open-ended funds reach several billion dollars of investor commitments, whereas most closed-ended funds have investor commitments limited to totals ranging from $250 million to $750 million (the maximum amount of investor commitments is specified in the individual fund's documents).

Because closed-ended funds have a limited life, their investors will seek to sell the property before the stated end date of the fund. …

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