FAQs

Private equity real estate (PERE) is an alternative investment class consisting of profession­ally managed private investments in real estate assets. Investing in private equity real estate involves pooling capital from multiple investors to finance the purchase and management of an individual real estate asset or a fund of assets.

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A syndication is a term used to describe any business that pools investors’ capital to manage a large investment, project, or transaction that would be difficult or impossible to accomplish individually.  By pooling resources, companies and individuals can reduce their individual exposure to risk and take advantage of their strengths to accomplish a goal.  Syndications can take many forms and are employed across industries, including (but not limited to) natural resources, media, banking, insurance, and real estate.  

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A syndicator or sponsor manages the money invested by the investors to achieve investment goals.  A syndicator or sponsor creates a single-purpose entity, usually an LLP or LLC, and raises money from investors who are limited partners of the LLP or LLC.  In exchange for the syndicator or sponsor’s time and expertise, the limited partners pay a management fee and sometimes split the earnings of the business or project above a certain threshold.

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The operator of a real estate syndication typically performs or directly oversees the management of the asset(s) including leasing, collections, maintenance, construction, and all other facets of operating the asset and executing the business plan.

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Passive investing is an investment strategy that does not require the investor to actively manage the investment or operate the business’s assets.  This strategy could include investments in stocks, bonds, hedge funds, private equity, or other businesses that do not require active participation in day-to-day operations.  Passive investors do not do any of the work to manage the business. Sponsors (aka syndicators, operators, or general partners) deal with the day-to-day operations of the business.

In private equity real estate, passive investors provide the equity capital for the project (purchase, rehabilitation, construction, etc.) in exchange for participation in the profits.  The sponsor brings extensive experience and provides the effort and knowledge to execute the project and business plan.  Passive investors participate in the benefits of real estate investing without the time commitment of managing tenants, maintenance issues, loan documents, and all of the day-to-day business activities.

For more details on passive investing, see the article:  How to Becoming a Passive Professional

PERE funds are typically single-purpose entities (LLC, LLP, etc.) established for the purpose of buying or investing in multiple real estate assets.  PERE funds are often created by a single sponsor who raises capital for the purchase of multiple real estate assets, providing diversification to investors with the multiple assets in the fund.

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• PERE funds of funds are typically single-purpose entities (LLC, LLP, etc.) established for the purpose of investing in multiple PERE funds.  By pooling investor capital, PERE funds of funds achieve significant diversification by investing in multiple operators’ funds.  This allows the fund of funds to diversify across many assets (dozens), markets (many states and cities), industry segments (multifamily, self-storage, industrial, etc.), and reduce exposure to a single operator.

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Under the federal securities laws, only persons who are accredited investors may participate in certain investment securities offerings.  One reason these offerings are limited to accredited investors is to ensure that all participating investors are financially sophisticated and can fend for themselves or sustain the risk of loss.  Sophisticated investors do not need to rely on the protections that come from a registered offering (e.g., a listed stock offering). An accredited
investor is defined as a natural person who:

• Has earned income in excess of $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years and reasonably expects the same for the current year, OR
• Has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence), OR
• holds a Series 7, 65, or 82 license.

There are other categories of accredited investors that pertain to entities and may be relevant to you:

• Any trust with total assets in excess of $5 million, not formed specifically to purchase the subject securities, whose purchase is directed by a sophisticated person, OR
• An entity with total investments in excess of $5 million, not formed to specifically purchase the subject securities, OR
• Any entity in which all the equity owners are accredited investors.

Unlike offerings registered with the SEC (like initial public offerings and stock listings) in which certain information is required to be disclosed, companies and private funds such as private equity funds, hedge funds, or venture capital funds that engage in exempt offerings do not have to make prescribed disclosures to accredited investors.  These offerings involve unique risks, and you should be aware that you could lose your entire investment.  You should talk with your financial and legal advisors before making any investment decisions.

See article: FAQ: Am I an Accredited Investor?

Typically, PERE investments are structured as limited liability companies (LLC) or limited partnerships (LP). The sponsor creates the LLC/LP and establishes a manager (typically the same entity or person as the sponsor) that is referred to as the general partner (GP).  The manager is responsible for managing the asset and executing the business plan.  Investors in the LLC/LP become the limited partners when they commit to investing money in exchange for participating in the profits of the business.  Limited partners typically have limited rights for influencing how the business is run by the manager.

An identified fund is for a specific asset and can be directly marketed to and vetted by potential investors.  Investor capital is typically requested at or just before the time of purchase.  Since the targets are predetermined, investors can research the properties or potentially go on-site before committing to the investment.

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A blind or semi-blind fund means none (blind) or only some (semi-blind) of the assets have been identified at the time of capital raising.  In other words, investors are required to make monetary commitments in good faith and without complete visibility into all the properties to be acquired by the fund.  Blind or semi-blind funds are most often operated by very experienced operators with long track records of performance with the same or very similar strategy.  While not as transparent as identified funds, these structures usually define the overall investment thesis, goals, and/or target allocation mix in the investment documents for the investors’ review.  The benefits for investors include diversification, operator flexibility and speed to market that allows the fund to purchase assets quickly.

Download our Guide: Investing in PERE Funds

Preferred return is the threshold return, typically expressed as an internal rate of return, (e.g., 8% IRR) that limited partners earn prior to the general partner’s participation in the profits of the business.

An equity waterfall describes the way partners in private equity investments share in the profit.  The term waterfall describes how the cash or profits from an investment flow down to the different parties involved in the investment.  The goal of the waterfall is to align the financial interests of all parties to the transaction.  There can be many levels or tiers to the waterfall but, generally speaking, each tier’s waterfall pool must be filled before the water (aka, cash) spills down the waterfall to the next tier. 

A simple, standard waterfall contains a preferred return pool and a profit split following the return of capital to investors.  The first cash paid out by the investment pays the preferred return to the investors or limited partners. Once the preferred return is paid, the cash is used to pay back the initial capital investment from the limited partners.  Once all capital is paid back, the profits are split between the sponsor and the investors by a predetermined percentage (e.g., 70% to investors / 30% to the sponsor).  This can take many different forms depending on the investment.

This document provides an overall summary of the opportunity, legal documents and terms, and all the conceivable risks that could make the opportunity go wrong.

A K-1 is a federal tax form that reports income, losses, dividends, and the capital account balance of a partner in an LLC or LP.  This document is created for each partner in an LLC or LP and is an input to the partner’s personal tax return, similar to a W-2 from an employer.

Just like the stock market, it is not possible to accurately predict private equity real estate returns due to the variety of investment strategies and market conditions.  However, the types of returns you will receive are similar regardless of the specific investment.  You will receive regular cash distributions throughout the investment period that typically start lower than the preferred return and rise as the business plan is executed until they match or exceed the preferred return.  You will also receive a return of your capital during capital events (a refinance or sale) and from excess cash flow.  In addition, you will receive a portion or split (e.g., 70% after the preferred return and return of capital) of the profits from the sale of the asset(s).

You will receive quarterly distributions starting approximately 90 days after your capital is accepted into the fund.

The typical lifecycle of private equity real estate funds is between five and ten years.

In most circumstances, the transfer of a limited partner’s ownership interests is strictly prohibited, and it is best to assume all investments are illiquid. In rare circumstances, and in emergency cases, ownership transfers can be arranged by the sponsor.

The target investments are residential and industrial assets in the Sun Belt states with growing populations and employment bases.  The target assets include stable and value-add multifamily apartments, industrial/logistics centers, self-storage facilities, and manufactured housing communities.

The target markets are sun belt states such as Florida, Texas, Georgia, North Carolina, and Arizona, but they could include any United States based property.  There will be no international investments. 

Yes.  Real estate benefits can produce tax benefits in the form of long-term capital gains, depreciation losses that offset taxable gains or income, tax free cash from refinancing, 1031 exchanges, among other, more nuanced tax strategies.

Yes, you will receive quarterly updates that include fund performance, financial reports, and investment level details.

Investment minimums vary by investment but generally range from $50,000 to $100,000.

Yes.  You can invest with a self directed IRA or solo 401(k).  You should speak with your financial advisors and IRA administrator before committing to an investment.

The sponsor of the investment or fund will manage the day-to-day operations of the asset.  In some cases, a third-party property management company is paid to manage the daily operations on-site.

All investments carry some level of risk.  We believe that our strategy of diversification within private real estate provides the best balance of risk versus reward along investing’s efficient frontier.  We invest with multiple proven operators who have been in the business for decades.  Our funds contain many assets in multiple markets and across industry segments, reducing the exposure to any single asset.  Our goal is preservation of capital first and return on invested capital second.  We believe that commercial real estate, residential and industrial assets in particular, are a great addition to a traditional stock and bond portfolio.  Commercial real estate is not correlated (prices do not tend to move in the same direction) to stocks and bonds, providing significant benefits of diversification.  We believe the benefits of real estate and diversification offset the risks. 

For more information, download our eBook:  Broaden Your Horizon and Expand Your Portfolio with Private Equity Real Estate.

Limited partners (investors) have limited control of the business and are typically constrained to voting rights regarding certain functions, such as the manager of the LLC or LP.

Although fees may vary depending on the investment, typical fees paid by investors include an asset management fee, property management fees, and acquisition fees.  Depending on the investment, additional fees such as construction management and disposition fees may also be charged.  Always read the legal documentation to understand the sponsor’s fee structure.