Real Estate Funds – What, Why, and How

We view real estate funds as a natural evolution of our product offering… Since 2015, EquityMultiple has been focused on providing pre-vetted direct investment opportunities. Direct investments give investors the chance to build their portfolio one property at a time. As part of our mission to make real estate investing more accessible, transparent and simple, we are now expanding the investment approaches we offer to include real estate Funds. Private real estate funds provide a number of features that make them a good alternative or complement to direct investments – most importantly professional management and built-in diversification – and we believe they are particularly compelling now as COVID-19 impacts the economy.

Throughout our growth, we have offered a variety of investments and structures to meet the varied needs and preferences of our investors, and to facilitate diversification within each investor’s alternative asset portfolio. In this spirit, we introduced both “Fund” and “Tax-Deferred” offerings during 2019.  As a result of this expansion of products, we now have three “Investment Approaches” by which we sort offerings on our Investments page. This article explores real estate funds, and why now is an opportune moment for this approach. We will also address some FAQs on real estate funds and our offerings. 

Real estate funds may be structured in many ways. Our Fund offerings are intended to provide built-in diversification, a high degree of transparency, and potential non-correlation to public markets, while maintaining a low-minimum investment threshold – a feature that is atypical of larger institutional funds. As of Spring 2020, we find ourselves in a fluid, uncertain macroeconomic environment – the fallout from the outbreak of a global pandemic has created headwinds for some real estate sectors while creating opportunities in others.

We feel that now is an opportune time for Fund investing for the following reasons: 

1. When investing in a real estate fund, your money will, by definition, be invested over time rather than at a single moment;
2. Investments will be diversified over a collection of assets within the fund strategy, de-concentrating risk;
3. Fund managers will be well positioned to act quickly and opportunistically when distressed investments become available;
4. Longer hold periods will allow fund managers to opportunistically time exits for particular investments to maximize value.

Below are a few FAQs on “Fund” investing and EquityMultiple’s fund products. 

Real Estate Funds – FAQs

Are EquityMultiple’s Fund offerings a good fit for me?

Some EquityMultiple investors may opt entirely for direct investments, preferring to dig into an individual investment’s thesis and select offerings that resonate most with their investing strategy and risk tolerance. Others may allocate more significantly to funds, which carry a higher degree of built-in diversification. We see many investors allocate to both – similar to investing in both individual stocks and to mutual funds.

EquityMultiple’s Fund offerings may provide an added element of diversification to your real estate portfolio with exposure to markets or property and security types otherwise absent from your portfolio. Particular fund operators could have spent years specializing in a market niche which would make them subject matter experts in making those sector-specific investments. As always, EquityMultiple will offer insight into these competitive advantages on each offering page.

For the reasons enumerated above, now may be a good time to consider allocation to real estate Fund offerings. 

What is the difference between blind pool real estate funds and an identified fund offering?

• In a blind pool fund, investors make commitments to the fund without knowing the specific investments to be acquired by the fund. While this structure offers less transparency, there is typically a strategy or target allocation mix that is clearly delineated for investors. It is the management team’s responsibility to identify investments and investor capital is “called” over time to acquire target properties. In this case, a fund manager’s historical track record and experience in the fund’s business plan is paramount.
• In an identified fund, the investments are already known and can specifically be marketed to and underwritten by potential investors. Often, all investor capital is “called” at or near the time of the commitment. In addition and because an acquisition target is predetermined, the portfolio can often support current distributions. 

EquityMultiple appreciates the merits of identified funds. However, in cases of excellent fund sponsorship and business plan, we will pursue blind pool fund offerings. As always, we will continue to provide our investors reporting and other updates as capital is further deployed by the fund’s manager through our Asset Management and Investor Relations teams. 

What are some of the structural benefits of investing in real estate funds?

Investors can gain diversification to various geographic regions; borrowers, sponsors and managers; security (Opportunity Funds, equity, preferred equity, and debt); and property types. 

As with Direct and Tax-Deferred Approaches, EquityMultiple provides a variety of Fund structures, and the opportunity to invest with differentiated operators. Each Fund investment is intended to provide inherent diversification while maintaining a similarly diligent underwriting and approval process to Direct Approach offerings.   

Depending on structure, the fund may offer flexibility with respect to the timing of investor funding. As an example, a Fund offering on the EquityMultiple platform may require investors to fund 50% of their intended investment at first closing. Over the course of the ensuing 36 months, the fund manager would require investors to fund the remainder of their investment on a rolling, pro rata basis as liquidity is needed for acquisitions by the fund. In this example, investors benefit from not having to contribute 100% of capital up front. 

What are the potential tax benefits of Fund investing? 

Fund investors may also benefit from a lower cost structure and tax benefits. 

Certain EquityMultiple Fund offerings may benefit from a REIT-like structure with respect to tax obligation. These benefits may include, but are not limited to:

• • Benefitting from dividend income rather than partnership distribution income;
  • An up to 20% exemption for dividend income to non-corporate taxpayers (a provision of the 2017 Tax Cut and Jobs Act);  
  • Tax-exempt investors will potentially not be subject to any Unincorporated Business Tax (UBT); 
  • Depending on the structure of the Fund, investors may only be required to file one state income tax return based on their primary residence, as opposed to filing in each state where the Fund operates.

In other cases, income from a Fund investment may be classified as passive income, and therefore be eligible for deductions from losses (negative income) attributed to other passive investments (such as other passive real estate investments). In any case, please be certain to consult with your tax advisor to understand the specific implications of any Fund investment you consider.

Will EquityMultiple be the Fund manager?  

We may (i) partner with an existing fund manager as a co-manager of an pre-existing or newly-created Fund investment, (ii) partner with a fund manager to distribute a Fund, or (iii) sponsor and manage a newly created Fund entirely ourselves. Our participation within a fund depends on a Fund’s target investments and objectives, investment qualifications, return targets, and/or quality of the Fund manager. 

EquityMultiple has already offered multifamily, manufactured housing, and infrastructure funds, and will pursue a variety of strategies going forward.

In all instances, EquityMultiple’s (and any other third-parties’) role and fees will be transparently detailed within investor documents.

What sorts of assets will EquityMultiple’s real estate funds?

EquityMultiple’s primary considerations in evaluating Fund products will be 

1. The risk-adjusted net return potential for our investors;
2. The strength of the fund’s overarching investment thesis; and
3. The quality of Fund management and constituent assets within the Fund’s existing portfolio (in the case of a pre-existing or co-managed fund).  

With those primary criteria in mind, EquityMultiple may pursue a variety of focuses or hybrid strategies for potential fund products. Examples of fund strategies that have already been invested into, or strongly considered, are:

• Stabilized multifamily
• Distressed assets
• Real estate securities
• Opportunity Zone Funds
• Debt Funds