Private Lender Perspectives: Private Equity Fund

by Paul Bernard - Residential Equity Partners, LLC.
November 3, 2013

Most real estate transactions have a complicated side and a simple side. From a high-level perspective, most things appear to be simple and straight-forward. The basic idea in a real estate transaction is two parties are exchanging the title to a property for something of value, usually money or another property. Look just below the surface and most of the moving parts become visible. Please take a moment to review the first article in this series where the short-term buy-renovate-sell project is explained and the private lender interaction is further clarified. The swim-lane diagram below was borrowed from that article to set the stage for this one.

We are again going to consider the role of the Private Lender in this process.

This time, however, we replace the idea of the private lender as an individual person with a group of like-minded investors. The key here is to have a well-written document outlining the rules and business relationship for multiple people or companies to work together and achieve a common goal. This is typically referred to as an Operating Agreement and can be summarized below.

Operating Agreement
There should be many sections and details in a robust private equity fund operating agreement. Here are the major parts with a brief overview of what they represent:

• The member qualification section explains the criteria for participating in the fund, including entry into and exit from the fund. 
• Investment objectives should be clearly defined so each fund participant knows how their money will be used and cared for while under the management of the fund. 
• All cost, fees and earning potential could be listed in a table and should avoid the use of complicated formulas. Here, simple is best. 
• All investing strategies have risk. The risks and potential losses associated with the specific investment strategies must be clearly stated along with the systems used to manage and minimize those risk.
• Investing criteria related to each market sector should be clearly defined. Allocations to each sector could be illustrated in a table. Again, simple is best. 
• Periodic reporting requirements should be detailed in the operating agreement so each member can monitor the activity of the fund and the performance of their investment capital over time. 

Business as Usual

The actual fund is represented by the operating agreement and exists as a binding contractual agreement. The fund manager is charged with the care and oversight of the fund and has an active role in every aspect of the fund. Once the fund operating agreement is created, the usage and process is identical to the Individual Private Lender model explained above and in the Basic article.

Instead of presenting an investment opportunity to an individual private lender, the deal is presented to the fund manager. The fund manager then reviews the deal and applies the approval structure and rules defined by the operating agreement. This is typically a multistage review and consideration process and could be performed by the fund manager or ideally by a committee of select fund participants. From there, the remainder of the process parallels the Individual Private Lender model.

Review the other articles in our Private Lender Perspectives series right here in this blog for more details.

Please visit our website to learn more about our firm and how we operate in the dynamic world of residential real estate. http://www.ResidentialEquityPartnersLLC.com