Passive investors in private real estate often have two investment structures available to them: a single-asset offering or a fund-style offering. Today, I want to explore the two options from the passive investor’s standpoint. In this analysis, I am comparing closed-end funds to single-asset, closed-end offerings.
There are often more similarities to these two structures than there are differences, but each sponsor has the ability to cater their offerings to match the needs of their investors. And from a technical standpoint, funds are syndications since the fund is combining investments from multiple passive investors.
From a legal structure, a single-asset offering and a fund are often very similar. Both structures entail the investor taking ownership in a limited partnership. During the subscription process, the investors will be asked to execute a subscription agreement, limited partnership agreement, and private placement memorandum. It is common for sponsors to carry over many similar terms, particularly if they are transitioning from a single asset to a fund model, but this isn’t always true.
With specialist sponsors — for example, those focusing on unanchored strip centers or value-add multifamily — the business plan is often consistent because the returns of a fund, just like a single asset, are driven by the actual operations of the asset. With diversified investments, the sponsor may offer funds with specific asset classes — for example, a retail or an office fund.
The biggest differences between a fund and the typical single-asset offering come down to when the assets are named. The common route for a single-asset offering is for the sponsor to source and get an asset under contract, then take the offering out to their passive investors. A fund will often take the offering out to the investors and raise commitments before naming any, or most of, the assets the fund will ultimately acquire. Additionally, a fund will often retain the rights to acquire multiple assets, creating a diversified portfolio of assets under a single investment offering and limited partnership.
Just like any private offering, there are many variations of offerings available, and the highlights above are what I would call “typical” structures. There are funds that own a single asset, and occasionally syndication offerings that are presented as a portfolio of assets.
The biggest benefit to a fund is the diversification a fund offers. Similar to a mutual fund or ETF in the public equities market, a fund investment often provides exposure to multiple assets with a single investment. Additionally, there can be operational efficiencies and cost reductions that occur in a fund model — for example, a single legal document versus unique documents for single-asset offerings, or a single K-1 from the fund versus multiple if invested in multiple single-asset offerings. In some funds, your investment can get to work faster, as some funds accept capital regardless of acquisition timing.
The benefit to single-asset offerings is the control you are afforded in your investment decision. Depending on the fund you are comparing to, a single offering also gives you a little more control over when your capital is deployed, as many funds, but not all, utilize a commitment and call style of funding, which could result in having to sit on idle cash during the investment period of the fund.
As noted in the opening, there are many different ways a sponsor can structure single-asset offerings and funds, so this article cannot be all-encompassing. At the end of the day, the two structures can be very similar, if the sponsor structures them as such, and the investor’s decision then becomes whether or not they value diversification over the ability to select which assets they choose to invest in.
About the Author:
Evan is the Investor Relations Manager for Ashcroft Capital. As such, he spends his days working with investors to better understand their investment goals and background. With over 13 years in real estate, he has seen all sides of real estate from acquisitions to capital raising on the equity and debt side, to operations, and actively invests himself. Please feel free to connect with Evan here.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.