Wipfli logo
Insights - Articles, Blogs and on-demand webcasts

Articles & E-Books


Keys to forming a successful real estate investment fund

Jun 29, 2022

As a developer or asset manager, you know that attracting investors requires attention to a myriad of financial and legal details. Even if you are the best networker and relationship-builder in the world, the quality and professionalism of your private placement memorandum (PPM) can make all the difference in launching a successful fund that confers confidence and trust with prospective investors.

These days, some investors are motivated less by maximizing their own financial gain and more by furthering a mission that is embodied by the development itself. The focus on diversity, equity and inclusion or environmental, social and governance initiatives may be the driving force behind some real estate investment funds, contributing to an increasingly crowded field in the search for equity and debt financing.

Focusing on the structure and content of your PPM is critical to provide reassurance about your strategies regarding your ability to raise money, fund governance and day-to-day management, as well as your total expected spend and projected ROI.

While it’s necessary to outline a strong vision for what the building project will look like and the tenant composition, it’s not always sufficient. Here are five important elements to remember when creating a real estate investment fund:

1. Provide funding source details

While highlighting any previous experience you have with getting deals done is advisable and helpful, investors in a current project require details about how their funds are being handled during the designated fundraising period. They want to know information such as how that money will be placed two to five years down the road or what the targeted returns are in, say, 5-10 years or more. Be sure equity and debt ratios are spelled out as well as the funding source for any borrowed money, whether it’s traditional commercial financing, mezzanine, PACE or a HUD loan.

Include a letter of intent from any banks you have been approved by, showing the amount of money you can borrow and the approved interest rate. If it’s a construction loan you’re seeking, you may need to show who is guaranteeing it and the gameplan for project stabilization and seeking permanent financing.

Additionally, you will need to meet a certain equity threshold before you can move forward in obtaining other financing. Otherwise, there is no deal. If you have an anchor investor willing to commit a significant portion of the equity requirement, it will be a lot easier for other investors to get involved. That first investor is critical also has a strong say in molding the parameters of the project. For at least 80% of potential investments, their biggest hurdle is insufficient equity and cash at the early stages.

2. Factor in shifting space needs and tenant mix

The COVID-19 pandemic has had a strong impact on commercial space needs, so it’s important to communicate to investors about lease terms on projects that could involve a repurposing of existing space. These changes are much more likely in the office and retail sectors, as working and shopping behaviors have changed dramatically. Those changes may well have shifted permanently in many cases.

3. Vet your professional team

As you develop a complex fund structure, make sure the professional team of CPAs and attorneys you’re working with offers the full complement of skills you need. When you hire generalists, you can run into problems if they lack deep experience involving partnerships, real estate, and tax law when drawing up complex financial agreements.

One of the most common missteps involves the structuring of carried interest or investor/sponsor waterfalls in the operating agreement. When legal documents are written up incorrectly, additional tax liabilities can be created for the parties involved.

The right professional team of CPAs and attorneys will be able to present you with options to help you make the best decisions for your fund structure. For instance, some developers want to be paid the developer fee directly; others want it rolled into the deal or a combination of both. Some have a requirement or option for those fees be invested in their deal, and some have separate asset management fees, property management fees, loan guarantee fees, etc.

4. Pay attention to growth areas

Lately, multifamily buildings are drawing a lot of interest, as are single-family rentals in the investment community. But every market is different, so be sure that the vision for a demographic area makes sense. What works in rural Wisconsin probably isn’t right in downtown Minneapolis. The deal size, tenant mix, exit value sustainability and potential value add through development, redevelopment, leasing and other items can have a significant impact on investor returns and expectations.

5. Know when the little things are big things

Even when you keep these fundamental criteria in mind when setting up a real estate fund, don’t get tripped up by the basics like time management. Pay attention to deadlines for various credit opportunities at the local, state and federal levels.

The always-competitive process of launching a successful real estate investment fund has gotten even more challenging in an environment experiencing dramatic market shifts and a generation of new participants. Be sure you understand the motivation of investors whose definition of ROI may go beyond what they earn for themselves.

How Wipfli can help

Wipfli can help you navigate real estate decisions during a time of dramatic market and economic volatility. We assist developers and asset managers with navigating the complexities of setting up a fund that will instill confidence in real estate investors and help asset managers reach their funding targets. Learn how we can help you make strategic decisions that make the most sense for you and your investors.

There are two more articles left in our five-part series on how real estate firms can adapt to change and pivot to remain relevant. Next up, a look at how to hire and retain employees and grow real estate leaders of the future amid an intense talent shortage. Don’t miss it. Sign up to receive our real estate content and information in your inbox.

Related content:


Cory Bultinck, CPA, MBT
View Profile
Dannielle Lewis, CPA
View Profile