Raising Equity in a Fund Structure

One of the most important functions of a real estate investment and development firm is raising equity capital. Many smaller and mid-sized real estate firms are structured with a main operating entity and various affiliate limited partnerships and limited liability companies that own the real estate assets and contain equity investments from various investors. An affiliate of the operating company is usually the general partner or managing member of these investment entities.

The operating company is usually family owned and run or started by a hard-charging CRE entrepreneur. Even though there is plenty of capital in today’s hot real estate market, raising equity capital for smaller and midsized companies is a very difficult task. It is usually done on a deal by deal basis in the affiliated flow-through entities that own the individual properties. For example, a West Coast-based CRE investment firm may have 20 or more different affiliated partnerships and limited liability companies that own CRE assets valued at $200 million, with an aggregate of $140 million in debt and $60 million in equity. The general partner or managing member of these entities and the operating company have to manage over time, 20 separate mortgages and 20 separate equity offerings and private placement memorandums, partnership agreements, subscription agreements, etc. If the average equity investment is $100,000, then there are 600 separate investors in the 20 deals.