MIRAMAR REAL ESTATE
KNOWLEDGEFINANCIAL.COM
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REAL ESTATE FINANCING GENERAL
INFORMATION
--- MORTGAGE LOANS LEARNING
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We work hard to exceed clients expectation, we
have the in-depth training and negotiating skills,
techniques and knowledge necessary to get you
the best price for your property in the shortest
amount of time.
LET ANTONY BE YOUR
REALTOR.
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AT:---
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CALL US:
HOME-SELLING GUIDE
We are always there for all our clients in
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I always felt that servicing my clients is a
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clients needs.
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Real Estate Funds
#1.
Private Real Estate Funds
Forming a private real estate fund provides a
means for the successful real estate developer
to access a dedicated pool of capital to fund
new investment deals without having to raise
capital on a deal-by-deal basis.
---------------
Private real estate funds enable managers to
pool capital without having to navigate the
cumbersome securities registration process
involved in launching an REIT (Real Estate
Investment Trust)
or other publicly-offered investment fund.
Despite the relative ease of implementation,
private real estate funds are structurally
complex and sophisticated investors will expect
to participate on terms that not only align
interests between the investor and general
partner/ sponsor, but that also reflect current
market trends.
#1.
Private Real Estate Funds
Forming a private real estate fund provides a
means for the successful real estate developer
to access a dedicated pool of capital to fund
new investment deals without having to raise
capital on a deal-by-deal basis.
---------------
Private real estate funds enable managers to
pool capital without having to navigate the
cumbersome securities registration process
involved in launching an REIT (Real Estate
Investment Trust)
or other publicly-offered investment fund.
Despite the relative ease of implementation,
private real estate funds are structurally
complex and sophisticated investors will expect
to participate on terms that not only align
interests between the investor and general
partner/ sponsor, but that also reflect current
market trends.
Real Estate Funds
#2 .
Entity Types
Private real estate funds
are typically formed using
an entity that is either a
limited partnership or a
limited liability company.
Both of these entity types are known as
pass-through entities so that they are
essentially disregarded for tax purposes and
all gains and losses are directly attributed to
the limited partners or members of the entity.
There has been a long standing tradition
among private investment funds of using
Delaware limited partnerships or limited
liability companies as the entity of choice.
However, principals should be aware that
the laws of many states may deem holding
real estate for income producing purposes
to be an activity that requires an entity to be
qualified to do business in the state where
the real estate is located.
#2 .
Entity Types
Private real estate funds
are typically formed using
an entity that is either a
limited partnership or a
limited liability company.
Both of these entity types are known as
pass-through entities so that they are
essentially disregarded for tax purposes and
all gains and losses are directly attributed to
the limited partners or members of the entity.
There has been a long standing tradition
among private investment funds of using
Delaware limited partnerships or limited
liability companies as the entity of choice.
However, principals should be aware that
the laws of many states may deem holding
real estate for income producing purposes
to be an activity that requires an entity to be
qualified to do business in the state where
the real estate is located.
Real Estate Funds
#3.
Admission and Withdrawal of
Investors
Since investments in real estate are illiquid,
private real estate funds have many unique
structural issues that must be addressed. An
initial consideration is whether to use an open-
end or closed-end fund structure.
Many investors favor the open-end structure,
which, in the simplest form, allows investors to
enter and exit the fund at regular intervals
determined by the fund’s sponsor.
However, the illiquid nature of a private real
estate fund’s investment assets often makes the
open-end structure unworkable since it presents
the fund with the dual problems of establishing a
fair value for each contributing and withdrawing
investor.
Closed-end funds, on the other hand, cause all
investors to join the private real estate fund at
the same time, removing the issues concerning
the initial value of their investments, and
restrictions can be crafted to match investor
withdrawal rights with the fund’s liquidity profile.
#3.
Admission and Withdrawal of
Investors
Since investments in real estate are illiquid,
private real estate funds have many unique
structural issues that must be addressed. An
initial consideration is whether to use an open-
end or closed-end fund structure.
Many investors favor the open-end structure,
which, in the simplest form, allows investors to
enter and exit the fund at regular intervals
determined by the fund’s sponsor.
However, the illiquid nature of a private real
estate fund’s investment assets often makes the
open-end structure unworkable since it presents
the fund with the dual problems of establishing a
fair value for each contributing and withdrawing
investor.
Closed-end funds, on the other hand, cause all
investors to join the private real estate fund at
the same time, removing the issues concerning
the initial value of their investments, and
restrictions can be crafted to match investor
withdrawal rights with the fund’s liquidity profile.
Real Estate Funds
#4.
Meanwhile, giving investors flexible withdrawal
rights can cause significant problems for a
private real estate fund. It is very difficult to
provide timely liquidity from investments in real
estate assets because there are really only two
ways to accomplish this objective.
One option is to arrange for the sale of the real
property investment. However, several
problems arise with this option, including:
forced sales generally result in substantially
reduced sale proceeds
sales transaction can take a considerable
amount of time to consummate
there may not be a ready buyer for the asset
or the asset may not even be in salable
condition (e.g., if the asset is a partially
completed development project)
The second option is for a private real estate
fund to leverage its real estate investments.
This option may not be particularly attractive or
even available based upon the fund’s existing
indebtedness and creditworthiness and
whether the fund’s real estate investments are
already encumbered.
Current market conditions have also made the
availability of debt financing rather scarce in
comparison to pre-financial crisis market
conditions.
Additionally, each of the two options mentioned
previously can adversely impact the
performance and risk profile of the fund for
each investor that does not withdraw. Real
estate fund sponsors should carefully match
the liquidity of a private real estate fund’s
investment assets with the withdrawal rights
offered to the fund’s investors.
#4.
Meanwhile, giving investors flexible withdrawal
rights can cause significant problems for a
private real estate fund. It is very difficult to
provide timely liquidity from investments in real
estate assets because there are really only two
ways to accomplish this objective.
One option is to arrange for the sale of the real
property investment. However, several
problems arise with this option, including:
forced sales generally result in substantially
reduced sale proceeds
sales transaction can take a considerable
amount of time to consummate
there may not be a ready buyer for the asset
or the asset may not even be in salable
condition (e.g., if the asset is a partially
completed development project)
The second option is for a private real estate
fund to leverage its real estate investments.
This option may not be particularly attractive or
even available based upon the fund’s existing
indebtedness and creditworthiness and
whether the fund’s real estate investments are
already encumbered.
Current market conditions have also made the
availability of debt financing rather scarce in
comparison to pre-financial crisis market
conditions.
Additionally, each of the two options mentioned
previously can adversely impact the
performance and risk profile of the fund for
each investor that does not withdraw. Real
estate fund sponsors should carefully match
the liquidity of a private real estate fund’s
investment assets with the withdrawal rights
offered to the fund’s investors.
Real Estate Funds
#5
Initial Capital Contributions
and Capital Calls
#5.
Private real estate funds possess certain unique
capital needs based on the nature of the fund’s
investment assets.
Most funds utilize a “capital call” structure where
investors are required to make an initial capital
contribution at the time the fund accepts
investment subscriptions.
The remaining amount of each investor’s capital
commitment is periodically “called down” by the
fund.
The capital call structure recognizes that most
private real estate funds will be unable to
precisely time the closing of the fund and the full
deployment of all of the fund’s capital. The fund
may also be making real estate investments
where:
a substantial amount of time is required
between the fund’s commitment to purchase the
investment and the consummation of the
underlying transaction, or
development activities are being undertaken
and the fund is only required to make periodic
progress payments on its investment asset
Not only is the timing of investor’s capital
contributions critical to a private real estate fund’
s ability to fund its investments, the contribution
of capital also generally starts the clock running
on the “preferred return” that the fund will pay to
the investors.
#5
Initial Capital Contributions
and Capital Calls
#5.
Private real estate funds possess certain unique
capital needs based on the nature of the fund’s
investment assets.
Most funds utilize a “capital call” structure where
investors are required to make an initial capital
contribution at the time the fund accepts
investment subscriptions.
The remaining amount of each investor’s capital
commitment is periodically “called down” by the
fund.
The capital call structure recognizes that most
private real estate funds will be unable to
precisely time the closing of the fund and the full
deployment of all of the fund’s capital. The fund
may also be making real estate investments
where:
a substantial amount of time is required
between the fund’s commitment to purchase the
investment and the consummation of the
underlying transaction, or
development activities are being undertaken
and the fund is only required to make periodic
progress payments on its investment asset
Not only is the timing of investor’s capital
contributions critical to a private real estate fund’
s ability to fund its investments, the contribution
of capital also generally starts the clock running
on the “preferred return” that the fund will pay to
the investors.
Real Estate Funds
#6
Allocation of Profits and
Losses; == Return of Capital
Most private real estate funds offer their
investors a preferred return, together with a split
of the fund’s overall net profits.
The structure that specifies the order in which a
fund’s profits and losses are allocated among
investors and the fund’s manager/ sponsor is
often referred to as the “waterfall.”
Waterfalls vary widely in their structure and
operation, depending upon a private real estate
fund’s investment assets and overall investor
profile.
Generally, profits are allocated in the following
order:
investors will receive a return of their capital
contributions
investors will receive a preferred return,
calculated on the total amount of their capital
contributions while such sums are held by the
private real estate fund
the fund’s manager/ sponsor will receive an
allocation equal to a portion of the total preferred
return allocated to the investors (usually in the
same percentage as the profit split and referred
to as the preferred return “catch-up” or sponsor/
GP “catch-up”)
finally, the remaining profits are split between
the investors and the fund’s sponsor
While no fund can ever guarantee the payment of
a preferred return, investors are assured that
they will receive the initial profits from the fund’s
investment activities before the fund’s manager/
sponsor is entitled to any allocation of profits.
However, there are a variety of ways to specify the
calculation of a preferred return based on the
timing of capital contributions or fund investments.
The purpose of including a preferred return
“catch-up” in a waterfall is to allow a private real
estate fund’s general partner/ sponsor to have
some participation in the fund’s profits, so long as
the preferred return has been allocated to the
investors.
#6
Allocation of Profits and
Losses; == Return of Capital
Most private real estate funds offer their
investors a preferred return, together with a split
of the fund’s overall net profits.
The structure that specifies the order in which a
fund’s profits and losses are allocated among
investors and the fund’s manager/ sponsor is
often referred to as the “waterfall.”
Waterfalls vary widely in their structure and
operation, depending upon a private real estate
fund’s investment assets and overall investor
profile.
Generally, profits are allocated in the following
order:
investors will receive a return of their capital
contributions
investors will receive a preferred return,
calculated on the total amount of their capital
contributions while such sums are held by the
private real estate fund
the fund’s manager/ sponsor will receive an
allocation equal to a portion of the total preferred
return allocated to the investors (usually in the
same percentage as the profit split and referred
to as the preferred return “catch-up” or sponsor/
GP “catch-up”)
finally, the remaining profits are split between
the investors and the fund’s sponsor
While no fund can ever guarantee the payment of
a preferred return, investors are assured that
they will receive the initial profits from the fund’s
investment activities before the fund’s manager/
sponsor is entitled to any allocation of profits.
However, there are a variety of ways to specify the
calculation of a preferred return based on the
timing of capital contributions or fund investments.
The purpose of including a preferred return
“catch-up” in a waterfall is to allow a private real
estate fund’s general partner/ sponsor to have
some participation in the fund’s profits, so long as
the preferred return has been allocated to the
investors.
Real Estate Funds
#7.
Fees and Expenses and
Related Conflicts of Interest
As an investment type, real estate is often
susceptible to the imposition of many fees and
costs, some of which can appear to be
duplicative or improperly allocated to investors
in a private real estate fund.
Real estate funds generally charge investors a
fixed management fee, based on a percentage of
the fund’s assets under management, to cover
the manager’s costs of operating the fund.
General fund expenses are also typically
factored into the overall net profit or net loss
available to investors.
For example, if a private real estate fund
contracts with a third-party to serve as a property
developer, general contractor, or property
manager for the fund’s investment assets, rather
than utilizing the fund’s general partner/ sponsor
in such roles, investors may question the
purpose or amount of the management fee.
Certainly, conflicts of interest may arise when a
fund’s manager/ sponsor does provide
development or property management services
to the fund and care should be exercised to fully
disclose any and all amounts that the fund may
pay to the fund manager and its affiliates.
It is often helpful for a private real estate fund to
consider a more customized compensation
system for its general partner or manager in
order to better align the interests of all parties.
#7.
Fees and Expenses and
Related Conflicts of Interest
As an investment type, real estate is often
susceptible to the imposition of many fees and
costs, some of which can appear to be
duplicative or improperly allocated to investors
in a private real estate fund.
Real estate funds generally charge investors a
fixed management fee, based on a percentage of
the fund’s assets under management, to cover
the manager’s costs of operating the fund.
General fund expenses are also typically
factored into the overall net profit or net loss
available to investors.
For example, if a private real estate fund
contracts with a third-party to serve as a property
developer, general contractor, or property
manager for the fund’s investment assets, rather
than utilizing the fund’s general partner/ sponsor
in such roles, investors may question the
purpose or amount of the management fee.
Certainly, conflicts of interest may arise when a
fund’s manager/ sponsor does provide
development or property management services
to the fund and care should be exercised to fully
disclose any and all amounts that the fund may
pay to the fund manager and its affiliates.
It is often helpful for a private real estate fund to
consider a more customized compensation
system for its general partner or manager in
order to better align the interests of all parties.
Real Esate Hedge Funds
#1.
The real estate hedge fund
structure is similar to a hedge
fund focused on trading
securities; however there are
some important differences.
Most importantly, as long as the real estate fund is
not investing in any securities (or money market
accounts which may, in certain circumstances, be
deemed to be securities), the fund will not be
subject to the Investment Company Act of 1940
and therefore will not need to fall within either the
3(c)(1) or the 3(c)(7) exemption.
This allows the real estate hedge fund a little more
flexibility than securities hedge funds. Notably, the
fund will need to adhere to the Regulation D
requirements of the Securities Act of 1933 only
and not the Investment Company Act.
This means that the fund will be able to have an
unlimited amount of accredited investors and up
to 35 non-accredited investors. There is no
requirement that investors in a real estate fund be
either a qualified client or a qualified purchaser.
#1.
The real estate hedge fund
structure is similar to a hedge
fund focused on trading
securities; however there are
some important differences.
Most importantly, as long as the real estate fund is
not investing in any securities (or money market
accounts which may, in certain circumstances, be
deemed to be securities), the fund will not be
subject to the Investment Company Act of 1940
and therefore will not need to fall within either the
3(c)(1) or the 3(c)(7) exemption.
This allows the real estate hedge fund a little more
flexibility than securities hedge funds. Notably, the
fund will need to adhere to the Regulation D
requirements of the Securities Act of 1933 only
and not the Investment Company Act.
This means that the fund will be able to have an
unlimited amount of accredited investors and up
to 35 non-accredited investors. There is no
requirement that investors in a real estate fund be
either a qualified client or a qualified purchaser.
Real Estate Hedge Fund
#2
Potential Investments
Real estate hedge funds are not limited in their
investment strategy and many such funds have
different strategies. Many funds purchase real
property and hold onto the real property for
appreciation.
Other funds will purchase raw land and then
develop the land or hire other companies
(including companies related to the sponsor of
the fund) to develop the land. Still other funds
will buy properties to manage for current
income.
---------------
Real estate hedge funds have always been
popular and considering the current stock
market turmoil and volatility many real estate
hedge fund sponsors believe that the time is
ripe to offer a real estate product to market
weary investors.
#2
Potential Investments
Real estate hedge funds are not limited in their
investment strategy and many such funds have
different strategies. Many funds purchase real
property and hold onto the real property for
appreciation.
Other funds will purchase raw land and then
develop the land or hire other companies
(including companies related to the sponsor of
the fund) to develop the land. Still other funds
will buy properties to manage for current
income.
---------------
Real estate hedge funds have always been
popular and considering the current stock
market turmoil and volatility many real estate
hedge fund sponsors believe that the time is
ripe to offer a real estate product to market
weary investors.
Real estate funds -
REAL ESTATE FUND
STRATEIGIES
#8.
They are trending toward
greater levels of
specialization.
Specialization may be by asset class,
strategy or both. Examples of asset class-
specific funds include: office, retail, medical,
industrial, agricultural, storage, hospitality, etc.
Real estate fund strategies can be loosely
categorized into one or more of the
following groups:
Distressed Asset Funds
Distressed asset funds seek to identify
undervalued assets that are over leveraged,
suffer from cash flow issues, or are
otherwise unable to access needed debt
financing.
Distressed asset funds tend to
be cyclical, following general real estate
market patterns.
Structured Finance Real Estate Funds
Structured finance funds, often referred to
as leveraged buyout funds, seek to use
substantial leverage to purchase real estate
that has fairly stable value projections.
Structured finance funds are also cyclical
in nature, as they rely heavily on
inexpensive access to debt financing.
REAL ESTATE FUND
STRATEIGIES
#8.
They are trending toward
greater levels of
specialization.
Specialization may be by asset class,
strategy or both. Examples of asset class-
specific funds include: office, retail, medical,
industrial, agricultural, storage, hospitality, etc.
Real estate fund strategies can be loosely
categorized into one or more of the
following groups:
Distressed Asset Funds
Distressed asset funds seek to identify
undervalued assets that are over leveraged,
suffer from cash flow issues, or are
otherwise unable to access needed debt
financing.
Distressed asset funds tend to
be cyclical, following general real estate
market patterns.
Structured Finance Real Estate Funds
Structured finance funds, often referred to
as leveraged buyout funds, seek to use
substantial leverage to purchase real estate
that has fairly stable value projections.
Structured finance funds are also cyclical
in nature, as they rely heavily on
inexpensive access to debt financing.
Joint Venture Real Estate Funds
#9.
Joint venture real estate funds
use a strategy
of co-investment with other
funds in a
syndicated investment.
Joint venture funds
can sometimes subject the investment
advisor to investment advisor registration
requirements, as the co-investment
relationship can be considered a security.
Real Estate Development Funds
Development funds are funds that acquire
unimproved land or demolish existing
property for re-development.
These funds
require substantial management
involvement in working through the various
municipalities permitting complexities as
well as coordinating the various stages of
real estate construction.
Accordingly,
development funds require substantial and
complex offering document disclosures.
Opportunistic/ Special Opportunity Funds
Opportunistic funds,
closely related to distressed asset funds,
focus on special circumstances where assets
are selling at a
discount, such as through buying foreclosed
real estate, unfinished construction, surplus or
damaged real estate
#9.
Joint venture real estate funds
use a strategy
of co-investment with other
funds in a
syndicated investment.
Joint venture funds
can sometimes subject the investment
advisor to investment advisor registration
requirements, as the co-investment
relationship can be considered a security.
Real Estate Development Funds
Development funds are funds that acquire
unimproved land or demolish existing
property for re-development.
These funds
require substantial management
involvement in working through the various
municipalities permitting complexities as
well as coordinating the various stages of
real estate construction.
Accordingly,
development funds require substantial and
complex offering document disclosures.
Opportunistic/ Special Opportunity Funds
Opportunistic funds,
closely related to distressed asset funds,
focus on special circumstances where assets
are selling at a
discount, such as through buying foreclosed
real estate, unfinished construction, surplus or
damaged real estate
