Investing in private real estate funds
The most common type of real estate investment fund is the private equity real estate fund, which is a closed-end fund that raises money from accredited. The traditional private-equity fund requires investors to inject a minimum of $, into a fund, although most managers are seeking individuals or. Private real estate investments are further differentiated because the investments are not publicly traded and require analytic techniques different from. BETC LONDON RATHBONE PLACE COMPUTERS
Midas Asset Management is not legally responsible for the investment decisions based on the information provided on this website. Therefore those considering investing in the funds should carefully read the prospectus before making investment decisions.
Past performance is not indicative of future performance. Fluctuation in exchange rates may have a positive or negative effect on the value of foreign-currency denominated securities and financial instruments. It may result in financial loss of its beneficiaries. While this may seem obvious, there are countless investors who will make investments without this information, based on a desire for exposure to a manager or asset class, and without a detailed explanation of the business.
Once you have the financials, a detailed review should allow you to develop a set of questions to further assess the opportunity. There are countless approaches to evaluating pro forma financials, and evaluating a business model , and too many to cover in detail here. Your ROC is then 7. An easy way to think about this number is as the expected yield of the property at the moment that it is stable.
Uncover the True Strategy The reason the return on cost is so useful is that it gives you a baseline for asking questions. If the planned ROC for properties to be acquired in a fund is 7. And the question that may be asked is what that difference is—is the plan to finance the properties at a lower rate? Is it that the manager expects the market rents to grow over time?
A combination of those things? The answer to that question what is the disconnect? Knowing the strategy, in turn, will help you make a more informed decision about the investment—for example, if the disconnect is future growth in rents, do you believe that thesis? And so forth. In addition to developing an understanding of the investment strategy, it is important especially for investments in funds to understand the contractual obligations of the sponsor with respect to the strategy.
In many cases, a sponsor may have a specific business plan that is shared with investors, but a broader set of options when it comes to the legal requirements set by their fund operating agreement. Obviously, this element is simpler when the opportunity is a specific property rather than a fund , but even there, it is important to understand what options are legally available to the fund or sponsor as all investments evolve over time.
Sponsorship Issues When making an investment in a private real estate offering and especially when considering a fund , the most important component outside of the investment itself is the sponsorship. Evaluating these elements up front is key to investing successfully. That person or organization will be responsible for making the right decisions with your capital in terms of which investments to acquire, what management decisions to make, and how to treat you as an investor. This element is often the trickiest part of underwriting private offerings.
It stands in contrast to evaluating the investment itself, where most of the considerations are based on facts, evidence, and numbers. Choosing a great sponsor is mostly a qualitative exercise. The challenge is that after the reviews are done and the reports filed, at the end of the day, investors will typically find themselves back in the same place where they started—having to make a qualitative decision about whether they trust a person or group of managers to carry out the proposed investment program successfully.
Unfortunately, there is no silver bullet for making this judgment call, but there are three useful strategies to consider in making the evaluation. Look for the Story, Not the Score First, in completing the evaluation of the sponsor, try to build a story rather than a score. The goal is to understand what experiences that person has had, what those experiences say about them, and how that narrative will grow into the future. Skill and Resource Match A second strategy is to focus closely on what skills are needed for the investment to be successful, and how the manager brings those specific elements to the table.
Or have they hired it out to a competent group? What is the core set of skills the sponsor is bringing to the table, and are they a good fit for the investments being made? Is the puzzle complete, or is there a jarring hole in the middle?
Too often, investors focus on broad generalizations that may not be relevant in the current situation. A sponsor may have been hugely successful managing a portfolio of existing apartment buildings, but are those skills now going to be applicable when they are acquiring retail land to build shopping centers? Or investing in industrial value-add projects? Or anything else? Closely related to what skills are needed is what other resources are needed.
For example, if the sponsor is required to sign on loans, do they have the capacity to do so? If they may be required to put cash in each transaction, do they have the cash or at least a means of getting it? If the investments require a team of professionals to operate, is that team in place? The next section will focus on financial incentives. This is a difficult topic when it comes to real estate investments, as the industry remains somewhat of a Wild West with respect to how sponsors are paid.
Most other investment classes have, if not perfect adherence to a standard, at least a basic established orthodoxy about what should be charged and how things should be structured. Not so in real estate funds. The driving factor behind this is that, first, a real estate investment fund requires varying levels of management time and effort, and, second, are highly structured and capital intensive—and therefore have a wide variety of potential capital options and alternatives that are considered when an investment is made by a sponsor of which raising money through a private offering is only one.
Based on the above, for example, a fairly large fee may be entirely appropriate for a development project that requires a sponsor to hire full-time staff to manage and focus on the project, or for a specialized debt investment that requires a large amount of business development time to identify and negotiate new opportunities. Those same fees may be wholly inappropriate for a long-term buy-and-hold fund that is doing nothing more than acquiring properties and sitting on them.
Alternate options available to the sponsor will also influence what the right economics are. If they are then the structure is likely appropriate, but if not then the investor should think carefully about their reasons for making the investment. Issues Related to Specific Terms There are a variety of terms related to private real estate investments that are important to consider.
A partial set is included here but not covered in depth. At a minimum, it is advisable to know the terms for each of these items in a proposed investment so that the decision to invest can be made with a complete picture. What is the means by which repayment will be made? Under what schedule and with what kinds of controls?
Additional Funding — What happens if additional funds are required that were not planned for? Treatment of Investor Funds — Do investor funds receive preferential treatment to other funds? In what ways? How are they split with the sponsor? Under what terms and at what times? Other Requirements of Investors — Does the investor have to provide anything related to the transaction other than their capital? Most importantly, are there any agreements that investors have to sign or provide security for?
Default — What happens if either the investor or sponsor fail to meet their obligations? What are the remedies? What is the process? Other Costs — Are there costs of investing outside of those charged by the sponsor?
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