Using a Fund Structure to Raise CRE Equity

Raising equity capital is one of the most essential functions of a real estate investment and development firm. 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 investor groups. An affiliate of the operating company is usually the general partner or managing member of these investment entities.

The operating entity is usually the face of the operation and family or entrepreneurially owned. 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 arduous task. It is usually done on a deal-by-deal basis in the affiliated flow-through entities that own the individual properties. For example, an established medium sized West Coast-based CRE investment firm may have twenty-five or more different affiliated partnerships and limited liability companies that own CRE assets valued at $300 million, with an aggregate of $200 million in debt and $100 million in equity. The general partner or managing member of these entities and the operating company have to manage over time, twenty-five separate mortgages, equity offerings, private placement memorandums, partnership agreements, subscription agreements, etc. If the average equity investment is $250,000, then there are 400 separate investors in the twenty-five deals.