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Starting a Real Estate Investment Fund: The Basics

Posted on April 12, 2017 by Kit Pettit

Written By: Kit Pettit

The process for starting a real estate investment fund involves much more than an attorney drafting the formation and disclosure documents and preparing regulatory filings. Drafting the documents is only one component of a comprehensive fund formation process. Long before the attorneys begin preparation of the formation and offering documents, there should be significant time dedicated to structuring the offering, considering the legal and tax issues involved, and deciding on appropriate investment terms in light of the fund manager’s strategy and access to investors.

Starting a hedge fund requires the attorneys to engage in an orderly, methodic approach to structuring the fund. This process should be driven by client goals, market understanding, legal considerations and regulatory understanding. To properly document the fund terms and structure to the manager’s objectives requires the attorneys to make a considerable investment of time to thoroughly understand the objectives of the fund. Once legal counsel and fund managers are on the same page with regard to the strategy and objectives, the attorneys are better able to walk the managers through the pros and cons of the various structural and investment term options. By taking the necessary time up front to understand the fund’s structure and giving appropriate guidance on the various applicable legal and regulatory issues, our clients avoid unnecessary delays in the process and errors in the initial offering documents. Our focus is to have a meeting of the minds between our attorneys and our clients on all material terms of the fund prior to commencing the drafting process. Our approach to establishing real estate investment funds involves three primary phases: (i) Strategy and Goals; (ii) Terms and Structure; and (iii) Drafting.

The Strategy and Goals phase starts before our firm is engaged. During the initial consultation with one of our attorneys, prospective clients have the opportunity to discuss their fund strategy, goals and potential investor base. From this discussion, our attorneys are able to begin the process of advising the client on the environment in which the fund will operate and identify specific risks, legal concerns, required registrations and potential exemptions. Upon engagement, we seek a more in-depth understanding of the fund objectives and strategy through in-depth telephone calls and/or personal meetings with the client.

After the initial engagement, our attorneys stay in constant contact with the client as they work through setting the terms and structure of the fund. We provide analysis as to how the fund strategy and structure will be affected by various legal and regulatory considerations. We also provide the client with an understanding of available options and the market and legal consequences of the various investment fund terms, including subscription issues, management compensation issues (including fund management fees), investor rights issues, and others. As we progress through the Terms and Structure phase, our attorneys continue to work with our clients to narrow down decisions on fund terms and structural considerations. Throughout the engagement process we seek to clarify issues, answer questions and collaborate on progress through regular contact with and updates to the client.

The final stage of the fund formation process is drafting the governing documents and offering documents and preparing any required filings. With adequate understanding and preparation in the previous stages, our attorneys proceed to prepare the documents tailored to the client’s specific needs. This preparation-based approach avoids delays caused by extensive redrafting, refilings and/or amendments, and helps prevent errors. Those interested in learning more about real estate investments and other commercial real estate matters, including financial transactions, should consider consulting with one of our attorneys, who can help explain the legalities, risks and processes behind such undertakings.

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