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THE ART OF THE RAISE How Fund Structures Are Used In Real Estate Partnerships

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Page 1: The Art Of The Raise Final How Fund Structures

1 TAX LIEN ARBITRAGE UNCOVERED

THE ART OF THE RAISE How Fund Structures Are Used In Real Estate Partnerships

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COPYRIGHT © 2016 DANDREW MEDIAALL RIGHTS RESERVED.

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CONTENTS What Does It Mean to Have a Real Estate Fund? ....................................................... 4

Types of Structures Are Out There .............................................................................. 5

Private Capital With A Dedicated Allocation ................................................................ 6

Joint Venture Fund ...................................................................................................... 7

The Classic Limited Partnership Structure ................................................................... 9

Aligned Investment Agreement with Institutional Capital ........................................... 10

Brokerage Structure ................................................................................................... 11

Types of Funds ............................................................................................................ 12

Calling the Capital ....................................................................................................... 13

The Three Sources: ................................................................................................... 14

Due Diligence ............................................................................................................ 15

Why Investors Like Real Estate ................................................................................. 16

Relating to Investors ................................................................................................... 17

Building and Selling Your Business Model ................................................................ 19

Calling the Capital ....................................................................................................... 20

Understanding Discretion .......................................................................................... 20

Risk Sharing .............................................................................................................. 21

Fees and Incentives .................................................................................................... 22

REITs ......................................................................................................................... 23

Clawback ................................................................................................................... 24

Catch Up Fees ........................................................................................................... 24

Crossed Promotes ..................................................................................................... 25

Leverage .................................................................................................................... 25

IRRs Vs Multiples ...................................................................................................... 26

Conclusion ................................................................................................................... 28

About the Author ......................................................................................................... 29

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What Does It Mean to Have a Real Estate Fund?

A fund is essentially a pool of money investors put together to make investments.

Some funds are closed, and managers seek funds primarily through their own

connections and networks. Often, these types of funds require large-scale investments,

in terms of millions of dollars.

Other funds can be invested in through traditional investor's markets and may offer

retirees and middle class investors the opportunity to invest.

One of the biggest advantages to investing in a fund is that your money will almost

certainly be managed by a highly knowledgeable and reputable money manager. This

person will likely hold years of experience in the partial investment field, and will know

the ins and outs of the industry. Real estate can allow investors to make huge gains,

and because it involves tangible assets that everyone is familiar with, many investors

consider real estate easier to understand than other types of financial vehicles.

If you are a real estate expert looking to start a fund, you will gain access to more

capital and potentially important connections by bringing investors on board.

Unless you are already very wealthy, you likely will not have the funds necessary to

fund major real estate investments all by yourself.

And even if you have the capital to do it yourself, working with investors will allow

you to spread risk.

Of course, you will have to share part of the rewards, but the trade-offs are well worth it.

Further, through management fees, you can even get paid just for running the

fund.

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Types of Structures Are Out There

As we mentioned earlier, there are several types of real estate funds.

Investors and fund managers can choose from a variety of options in order to create a

structure that best serves the needs of both the managers and the investors.

In this section, we will outline four of the most popular types of funds, including:

Private capital with a dedicated allocation

Aligned investment agreement

Joint venture/facility fund

“Classic” LP structure

We will go over each of these types of funds in the following sections and explain some

of the key differences.

We will also highlight some of the strengths and weaknesses of each fund type.

1

2

3

4

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Private Capital With A Dedicated Allocation

A private capital fund is pretty straightforward.

Capital simply refers to money, so private capital then is simply private money. This

means that investors are choosing to invest their private money into a certain

undertaking. Often, with this structure it will actually be investors who seek out qualified

managers to handle their investments.

The strengths and weaknesses of this structure largely stem from the fact that it is

usually a small group of investors and a dedicated team of managers running the fund.

Usually, investors and managers will be very familiar with each other, and may even be

friends.

This “coziness” has many strengths. Funding

will often be private or raised through personal

networks so managers don't have to “hit the

road” and make sales pitches to raise capital.

Often, this tight-knit group will be flexible and

able to quickly adapt to rapidly changing

circumstances. Given how turbulent the

economy can be and how quickly opportunities

and risks can develop, this may prove essential.

Still, there are sometimes conflicts over

discretion, meaning how much control the fund

manager has to make decisions without the

approval of investors.

Funding is private and relies on personal networks and connections

Ability to quickly respond to

changing market conditions

Strengths

Personal relationships can complicate business

Reliant on a small group of people

High levels of risk for investors

Weaknesses

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Further, personal relationships may come to interfere with business relationships. Also,

because the group of investors is generally quite small, they will be taking on a

considerable amount of risk. If the fund should fail or lose money, it will fall squarely on

the shoulders of a small number of investors.

Joint Venture Fund

Sometimes fund managers and investors may reach out to people outside of their own

fund or company to come on board and do investments together.

This is referred to as a Joint Venture (JV) In this situation they may opt to do a join

investment with another investor or property group. This helps to spread risks and

leverages the skills and networks of everyone

who joins up with the joint venture.

Let's say you are running a 20 million-dollar real

estate fund and are approached by a local real

estate developer, John. John a smaller player,

managing only 5 million dollars’ worth of capital

and assets, but he has a good reputation, and

his investments are paying off. John specializes

in an area you are familiar with, but don't count

yourself as an expert, say hotels.

John knows of a great investment opportunity for

an older hotel located on a prime beach. It's

selling for 5 million dollars, but he thinks he can

negotiate down to 4.5 million dollars. Not only

Have to manage fund-to-fund relationships

Have to share in profits

Potential for more politics and infighting

Weaknesses

Able to leverage assets and skills of multiple companies/ funds

Spread risk among several companies/funds

Increased networking potential

Strengths

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that, but John is confident that with a million dollars’ worth of remodeling and rehabbing,

he will be able to sell the hotel for at least 10 million dollars.

The problem is that John does not have the 5.5 million dollars to buy and remodel the

hotel and has only 2 million dollars to invest. John decides to approach you and your

fund with a deal. He will put in 1.5 million dollars of his money, and your fund will put in

the additional 4 million dollars.

Then, John will help oversee the remodeling of the hotel and within two years sell the

hotel off to the appropriate party. John will then split the profits accordingly.

As we can see, a joint venture can be a great option because it spreads risk and can

also allow you to tap into skills that you yourself do not necessarily have. In this case,

you don't have hotel real estate development skills but John does.

John, on the other hand, doesn't have the capital necessary to complete the deal, but

you do. By teaming up, both parties benefit and if all goes well, both parties will profit.

One of the most difficult things with a joint venture is mediating differences between

investors.

If the deal is 75-25 with your company putting up 75 percent of the investment, most

likely you will have the most say in any investments. If it's 50-50, however, you may

need a unanimous decision between both parties, and that can sometimes be difficult to

arrange. Learning to deal with and mediate differences in investment philosophies and

points of view may be essential for a joint venture, so always keep that in mind.

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The Classic Limited Partnership Structure

This structure is perhaps the most common type of structure for a real estate fund.

Usually, this structure works best for smaller funds with a more limited number of

partners. While the actual dollar amount of the fund may grow to become quite large,

often a classic LP will have a limited number of partners.

An LP simply refers to two or more partners who join together to pool money and make

investments. Each partner is liable only for what they have invested. Partners do not

receive funding through dividends, but instead direct cash access.

Generally speaking, one member will take

charge as the lead LP and invest the largest

single portion of the LP. After a person comes

on board as the lead LP, it's quite common to

continue to raise funds through successive

rounds of fund raising.

Like other partnerships, LPs depend on high

degrees of trust. The better the partners are at

working with each other, generally the better the

fund will function. For an LP to work, the group of

friends or partners must have direct access to a

considerable amount of cash. This is especially

true in real estate investing where investments

can be quite costly.

In other words, a few thousand dollars might be

enough to start up a small stock portfolio, but it's

not going to be enough in most cases to facilitate investing in real estate.

Often easier to manage personal relationships

Quick and responsive

Small group of investors means increased rewards of profits

Strengths

Can complicate personal relationships

Need to establish clear authority and decision-making structure

Limited capital

Small group of investors assume all risk

Risks

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Aligned Investment Agreement with Institutional Capital

An Aligned Investment Agreement with Institutional Capital is another important fund

type worth considering.

For the sake of space, we will refer to this simply as “aligned investment” from here on

out. With this type of fund, money is generally provided by an institutional investor, such

as a hedge fund.

Institutional investors are in the game to make money, and if it happens that they

believe that investing in you and your real estate investors will result in strong profits,

they may choose to provide you with the capital you need to invest.

With this type of investment, the institutional

investor generally controls the assets and

usually has the final say on any investments

made. In this sense, the fund isn't yours and the

investments are not yours.

As a manager, you will earn your money

through fees and other forms of income. For

many people, this set-up probably doesn't

sound as enticing as other investment set-ups

that let you maintain more discretion and

ownership of the fund.

Of course, on the other hand, there will be less

direct risk to you. If the fund suffers losses,

ultimately the institutional investor will have to suck them up.

Institution firms may have a lot of power and demand a lot of say

Must work to please and reassure investors

May have to defer to larger organization's wishes

Weaknesses

Access to large amounts of capital

Pooled resources of larger organizations

Risk is assumed by large firms that can handle risk

Strengths

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Brokerage Structure

For many people who are familiar with the real estate market, but don't have a lot of

experience in running real estate funds, the brokerage structure is a great starting point.

In this situation, you basically act as a broker for deals. Let's say you are a commercial

real estate broker for Sunshine City and through your daily work, you come across an

office building for sale that looks like a really good deal. You know the owner is going

through some financial difficulties and is looking to offload the property quickly, and so

has priced the property to sell.

As soon as you see the property go up for sale you realize that it's a great investment

but don't have the funds to invest yourself. You happen to have a local friend; however,

who is handling an investment fund and would

have the cash to purchase the building. You

could approach your friend and see if he wants

to do the deal and make the necessary

investment. In exchange, you could receive a

set fee or a part of the investment.

This type of arrangement is great for people who

are familiar with a given field, such as real

estate, but don't have the funds yet to invest.

With this structure, you don't need funds to

invest, but simply knowledge to leverage or sell.

Best of all, a brokerage arrangement will allow

you to get a feel for the investing side of real

estate and help you get your foot in the door.

No committed capital

Relies on selling deals

May not have direct control over investments

Weaknesses

Minimal risk for investors

Good for networks

Can leverage a lot of money

Strengths

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Fractionalized Trust Deeds or Notes

You go out chasing folks with small money invest in part of a trust deed

Lots of heavy lifting. Very inefficient. Constantly pounding the pavement for Deal Flow and Investor

Reg D Fund “Classic LP” Structure

Capital is already pooled, Ready to pe deployed.

Capture Management Fees, and other performance

incentives (splits”)

Institutional Capital Alignment

“Approval in a box”

Deal by deal approval.

Allows you to build a track record with a larger player’s

balance sheet

Types of Funds

Dis

cre

tio

n

an

d F

ees Not much discretion.

Investors can walk from the deal

Incentives are not great.

Deal-by-deal

Has slightly better discretion and fees but this model allows you to build your brand.

This is the “gateway drug” to a fully funded fund

Most discretion, best economics. Most money made here.

Prestige! The “Promised Land”

Can add leverage to juice your fees.

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Calling the Capital

For any fund to run, the fund manager must put together the capital necessary to make

investments.

Or in other situations, investors may actually put money together, and then approach

qualified people who they think will be able to manage their investments and record

strong returns.

A fund may be open, or it may be closed. A closed fund means they are not accepting

funding, and fund managers only work through their close networks in order to raise

capital.

Often, once a certain milestone is reached, say 50 million dollars, the manager stops

accepting funding altogether. This allows him or her to focus on actually putting the

money to work. After all, while raising capital is important, actually making money off of

investments is the real aim of the fund manager.

There are three primary sources for funding. Your personal network, brokers, and

placement agents. Each one of these sources is unique and has its own advantages

and drawbacks. As such, we will go over them separately and in detail in the next

section.

You should consider all of them closely. Often, it is best to use a mix of the three

funding sources. This helps you maximize the amount of money you receive, while also

ensuring that risk is spread around.

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The Three Sources:

1. Family, Friends, and Personal Network. Family, friends, and other associates you

find through your personal network can be a great resource for funding. With this

type of funding, you are often granted a high amount of discretion. As you start

pitching your fund, your network may begin to grow. For example, you might pitch

the idea to a friend, who then in turn introduces you to another friend who might be

interested. You should be warned, however, that business relations often stress

personal relationships.

2. Brokers. Do you know someone who is managing over an investment fund? If so,

they might be interested in acting as a broker for your investment ideas. Basically, if

you see a good real estate investment in the market, you could turn to your broker

and pitch the idea to them. If the broker closes on the deal, they can pay you a fee,

give you a piece of the investment, or compensate you in some other mutually

agreeable way. Often, however, the broker prefers to act as a capital broker. In this

case, the broker will help arrange capital for its clients. The reason brokers prefer to

work with this model is because they often lack the skills and knowledge to properly

manage real estate investments. After all, that's actually your area of expertise, so

why not benefit from it?

3. Placement Agents. Placement agents will introduce you to investors and help you

find investment capital. Their services don't come free, of course, and they will likely

charge you a fee. They may also charge the investor a fee. Placement agents are a

great resource because they often have extensive personal networks that can be

leveraged to drum up investments.

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Due Diligence

Of course, investors are not going to simply give you money. They are going to perform

due diligence and inspect your personal background and investment vision, among

other things, to make sure that you deserve this funding. If you have an established

track record, they will look at this very closely. If you are new to managing investments,

investors will look at your overall skill sets to try to figure out how good of an investment

manager you will make.

Your investors will also want to know about your team. How many people will be

working with you? Who will handle what? Do you guys have a track record of working

together? All of these questions and more will be asked. Basically, investors will want to

make sure that the appropriate skills are present and that your team will have the

necessary chemistry to work together.

Trust and credibility will also be major issues. Often, emotions can have as big of a role

in investments as logic. Investors want to feel that they can trust you and your team.

Trust is important both for securing an initial investment and also for increasing the

amount of discretion you have as the fund manager. And, if an investor doesn't trust

you, they probably won't make an investment, no matter how good your pitch is.

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Why Investors Like Real Estate

While securing investors may require a lot of time and patience, there are some

advantages to real estate investing vs. other assets. For one, just about everyone can

come to understand real estate investing. Real estate isn't some intangible and hard to

explain derivative or other difficult-to-explain asset. Instead, people get to invest in

something they can see and touch.

Not only that, but also just about every adult has experience working with real estate.

For example, the vast majority of us have bought or renting housing. Many people have

also had to rent, lease, purchase, or build office and commercial space. While not

everyone is an expert, just about everyone can understand the value of real estate.

Further, in spite of the 2009 Financial Crisis, real estate has a very strong track record.

While prices did develop into a market pre-2009, real estate had grown steadily for

decades beforehand. Many people made huge amounts of money. And, in the future,

many people will again make huge amounts of money off real estate. Yes, real estate

investing has suffered some brand damage in recent years, but many people still

believe in it. And rightly so, real estate markets may have bottomed out and now might

be the perfect time to invest!

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Relating to Investors

So there are many reasons that investors prefer real estate to other investments. Now

you have to relate these reasons to investors, and also sell the particular investments

you want to make.

While people often think of the capital raising stage as the primary time to sell

investments, it is often important to sell your investments at later stages. At the very

least, constantly updating investors to the investments you are making, and explaining

why you are doing so, will build trust and credibility. This could come in handy if you

decide to launch another fund later on.

At both the initial capital stage and later on in the investment stage, you will need to

explain to investors why you are investing in particular properties. Explain to investors

what types of properties you look for and why you like them.

What are the particular attributes you look for in a property? Details in the construction,

such as the type of wood used or concrete poured, so long as these details actually add

value, can go a long way in building credibility. For example, let's say you are investing

in an area with known termite problems, but the building you are looking at investing

was actually constructed of termite repellent wood. Small details like this can go a long

way in making you look professional.

There are numerous other ways you can add details to your explanations. Market

conditions, urban development projections, crime rates, and all sorts of other details can

add value to your investment and thus also your pitch.

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You should be working constantly to redistribute money to your investors. At first, this

might seem like common sense. Still, if you think about it, redistributing money may

occasionally come at the cost of making great investments. For example, you might turn

down an opportunity to invest in a great long-term deal and instead choose to invest in a

short-term deal, simply so you can quickly return money to your investors.

In fact, securing some short-term deals that you can make some profits off of, and then

distributing money is a great way to build trust among your investors. This little trick is

known among many professional investors. In short, fund managers will look for a few

very short-term deals to invest in, just so they can send checks to investors' mailboxes.

Why? Money talks and in the investing world, checks are probably the greatest form of

communication you can use.

Besides checks, you should also consider regular newsletters and also impromptu

letters to investors to update them on events. Whether to use email or mail will likely

depend on your clients and their preferences, so give them options. With some of your

largest investors, you should also consider holding lunches or dinners, and other social

events. This will keep the atmosphere friendly, but also ensure that everyone stays

updated.

It is especially important to explain yourself to your core group of investors. These are

the people who are providing the most funds and most connections. A solid group of

core investors can be the difference between a successful and unsuccessful fund.

If all of this sounds like a lot of work, take solace in the fact that over time it will become

easier. For one, you will grow better at pitching and relating to investors. Also, if you

perform well, your track record will grow, and investors will come to trust you more. The

more trust you build, the less explaining you will have to do.

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Building and Selling Your Business Model

Once you have caught an investor's interest, he or she is going to be very interested in

seeing your business model. Most potential investors will want to know all of the details

behind how you will conduct business and whom you will deal with. This is especially

true for people who are new to the market. If you have a long track record, investors

may be more willing to invest without going over all the details.

Investors are going to want to know about your basic business vision. What are you

investing in and why? What skills related to this field will you bring to the table? For

example, if you spent ten years as a commercial real estate broker and now see a lot of

opportunities in the market, you should explain all of the details to your investors.

Also, investors will want to know how potential investments will come to you. Do you

have a large personal network in the field? Going back to our example, if you are a

former commercial real estate broker, you probably know a large number of property

developers and other parties who are selling real estate. Make sure you sell any

connections you might have. And if you are setting up a brokerage system where

people will come to you with potential leads, let your investors know.

Also, how are you going to source various aspects of your business? For example, if

you specialize in purchasing houses in bankruptcy and then remodeling them before

flipping for a profit, who is going to handle the remodeling? Will it be in-house? If so,

what experience do you have in this area? If you are outsourcing, what is the

arrangement, and why is this arrangement the best possible option?

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Calling the Capital

Understanding Discretion

Discretion is an important concept for many fund managers and investors. Basically,

discretion refers to how much control an investor has over making investments. If the

manager has 100 percent discretion, that means s/he can make whatever investment

s/he wants.

Obviously, many fund managers prefer this set up as it gives them the most flexibility

and allows them to act as quickly as possible.

If a manager is running a closed fund with only 5 investors, these investors may ask to

have greater oversight and control over their investments. In a certain sense, the

investors may ask to act of a sort of board of directors and actually require that their

fund manager obtain approval before making a specific investment. In this case, the

fund manager has no discretion.

Investors might also decide to allow discretion for small dealers. This can be thought of

as “stepping up” discretion. For example, let's say a fund manager is managing over 20

million dollars in assets with contributions from 10 investors. These investors may opt to

give the manager 100 percent discretion for all deals under $500,000 dollars.

If you are just starting a fund, you may not be given full discretion. Still, over time, many

managers have found that with repeated strong performances, investors become more

trusting and are often very willing to increase discretion. Trust is very important. And

over time, many fund managers find themselves with 100 percent discretion.

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Risk Sharing

While individual circumstances may vary, risk is generally shared in portion to the

amount of money invested. Most fund types, including limited partnerships, try to limit

total risk to the amount of money that is invested. This means that if a fund goes

bankrupt, usually investors will not be asked to pay up more money than they have

already invested. And if this is the case, those who invest the most will lose the most.

Those who invest the least will lose the least.

Risk sharing is one of the most important reasons why people invest in funds. Even a

wealthy person who has enough money to facilitate all of the trading on his or her own

may opt to start or participate in a fund, instead of going it alone. Why? Most of the time

the investor will be looking forward to sharing risk. The simple fact is that no matter how

good an investment looks, it will come with risk. By sharing risk, an investor limits

liabilities and potential losses.

Of course, with shared risk there also come shared profits. After all, people don't want to

share the risks if they also don't get to share the rewards. Generally, people are

rewarded in proportion to how much they invest. Of course, the people who manage the

fund and actually direct trading, will likely stand to earn more through fees and

performance bonuses.

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Fees and Incentives

Managers do not manage over investments free. Managers are highly-skilled and

expect to be well compensated. As such, they usually charge a variety of fees. These

fees and incentives add up to the rewards that a manager makes for managing the

fund, and most importantly producing profits. The manager of the fund expects an extra

cut of the profits, extra earnings, or a combination of both for managing over the fund.

Profit splits are probably the most widely known type of the incentive. With a profit split,

the fund manager essentially takes a share of any profits made. So a manager might

have a 20 percent profit split fee. Then if the fund makes 1 million dollars in profit, the

manager will earn 200 thousand dollars.

Fees are generally designed to align the interest of the manager and the investors. In

short, this means that the more profits the manager produces, the more money he or

she is paid. By providing incentives for performance, investors can ensure that they

maximize profits. This way, investors and the fund manager(s) both benefit from each

other’s mutual prosperity.

Managers also charge fees, usually on an annual basis. With a fee, money is awarded

no matter what. Usually, the fee is based on either the amount of money invested in a

fund, or the amount committed to a fund. There are advantages and disadvantages to

both.

If fees are charged on the amount of funding invested, then you encourage the manager

to invest all of your funds, instead of sitting on them. On the other hand, this could

encourage the manager to invest the funds quickly and without as much prudence,

simply in order to collect fees for investing the money. Of course, proponents of the

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invested fee argue that otherwise investors will have no incentive; managers could

simply sit on the funds in order to produce profits. This is unlikely; however, as fund

managers are very careful while managing their reputations and collect a large portion

of their income from profit sharing.

REITs

A REIT, or Real Estate Investment Trust, is an investment security. Usually when

people think of investing in real estate, they think of people investing in actual houses or

buildings. A REIT is more similar to a stock investment. Instead of buying a house, you

invest in a REIT. The company or person who manages the REIT then invests the

money.

REITs can be set up as an equity REIT in which the value of the financial instrument is

based upon the value of the portfolio. Revenues will come from rent or profits made off

of the sale of a real estate venture. REITs can also be set up based on mortgages, in

which the value of the financial instrument is based on mortgages. With this type of

REIT, profits will be made off of interest rates.

Many investors like to invest in REITs because they are highly liquid assets that can be

sold quickly on financial markets. If an individual chooses to invest in actual properties,

they might have to wait months, or even years, before they can sell the property or

produce profits from rent. With a REIT, if a person must liquidate their investment to

raise cash, it can usually be done in a short amount of time.

As an investment manager, you could choose to set up a REIT. While this may be

difficult for smaller investors, if you build up a strong reputation, this could be a great

way to raise money. Some investment managers prefer running REITs because they

are less dependent and beholden to a core group of investors. Instead, the larger

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market can be used to raise capital. Of course, actually reaching the stage where your

reputation and performance are so strong that it justifies a REIT can be very difficult.

Running a REIT may also give you access to corporate level debt structures. This

means that you can sell bonds and raise money as a corporation, a benefit denied to

many traditional real estate investors. REITs also feature some tax benefits. For

example, the profits from REITs are taxed as capital gains, which are currently lower

than corporate, and in many cases personal, interest rates.

Clawback

A clawback is a special circumstance when money is distributed and then “clawed back”

for various reasons. Clawbacks are becoming increasingly popular among companies

for various reasons. Most importantly, clawing back money allows companies to

reinvest and potentially produce more profits.

You should be careful if you decide to use a clawback. Make sure you properly convey

your message to investors, as they may get upset. You will need to stress that the

short-term clawback will result in long-term gains for investors. Indeed, a well-conducted

clawback will benefit investors more than anyone else, so make sure you stress this.

Most investors are looking for stable, long-term growth, so they may even appreciate

the clawback, so long as it is properly conducted.

Catch Up Fees

Catch up fees allow fund managers to receive an extra cut of the profits once a certain

profit threshold is reached. In short, this type of provision gives managers extra

incentives for high performance, while also limiting risk for investors to a certain extent.

Risk is limited because investors only pay catch up for performance.

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This type of fee also gives the fund manager a strong incentive to maximize returns.

The better a fund performs, the more money the fund manager will make. Balancing

between the interests of investors and fund managers is always a tricky but essential

balancing act. Catch up fees offer a great way to balance these needs.

Crossed Promotes

Another important term to understand is cross promotes. This basically refers to cross-

promotional deals. In this situation, a manager from Fund X may decide to back the

manager of Fund Y by transferring some capital from Fund X to Fund Y. Money often

changes hands quickly and fluidly as managers look to maximize returns by hopping on

board for the best investments. Cross-promotes allows funds to take on increasingly

large projections and make bigger investments.

You should be careful; however, because the management fees for both funds can

quickly add up. Some investors may even question if being charged fees two or more

times by two separate funds is fair. Make sure you explain clearly to investors how you

will handle fees and also why the cross-promote will benefit them in the long run.

Leverage

Leverage is one of the most simple and at the same time most complex terms you will

ever come across. At its most basic level, it simply means any technique to increase

gains or losses. You might leverage the value of your home to start a business, and

thus produce profit. You could do this by taking out a (second) mortgage on your home

and then investing your money.

A corporation might leverage the value of its stock, profits, or whatever to borrow money

to reinvest and thus increase profits. On and on the list goes. Of course, in the

complicated world of finance, things are much more complicated.

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When approaching real estate, you may ultimately have to choose between leveraging

your resources at the fund or asset levels. Each has its own unique advantages and

disadvantages. In general, asset leveraging is probably most effective when you already

have a lot of assets, such as property, to leverage. Fund level leveraging relies more on

your company's performance and reputation, so if you have good “street cred” you may

be able to leverage that.

Asset based leveraging means you are using your assets to gain additional funding.

One simple way to think of this is mortgaging your property. In essence, you are putting

up the value of your assets to gain additional funding. Banks and other companies that

may be looking to loan you money or give you access to capital will be reassured by the

knowledge that you are staking your assets.

Of course, if you have not yet bought a lot of property, you may not have any assets to

leverage.

At the fund level, you are leveraging your fund's reputation and performance. This may

be a bit more speculative than asset based leveraging, so there are often higher risks.

IRRs vs. Multiples

There are two primary ways to measure the performance of a fund. The first way is

called the internal rate of return (IRR), while the second is referred to as “multiples.”

Both methods are used to measure performance, and both have their own distinct

advantages and disadvantages.

With an IRR, the present value of an investment is set at zero. Then all income and

earnings are either measured or projected from this starting point of zero. This way, you

can show the internal growth of the project. This allows you to easily show investors

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how much money the investment is earning over a period of time. An IRR can be

difficult to calculate, however, and is often based on projected or assumed numbers.

A multiple actually refers to dividing one performance measure by another. A simple

and well-known multiple is a Price per Earnings Ratio. You could set up a multiple to

help investors understand how you are performing. For example, you could set up a

measure that shows how much profit you produce off of each dollar invested. If you turn

every dollar investment into 1.2 dollars, then you can show a ratio of 1.2/1.

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Conclusion

When a real estate fund is done right, everyone benefits. Investors benefit by seeing

strong returns and maximizing their investments. Fund managers benefit from collecting

fees, sharing profits, and gaining access to the capital they need to purchase properties

and other assets. Even local communities can benefit from an increased inflow of

capital!

Of course, a real estate fund does not come without its risks. Right now, real estate

markets seem to be stuck on a roller coaster. From Shanghai to Boston, property values

are oscillating up and down. This creates a lot of opportunity for money to be made. By

when the properties are cheap, sell when the properties are expensive. Still, such

turbulent conditions require close and professional monitoring.

Either way, remember to always assess risk when investing in real estate. It's rarely a

good idea to put all of your eggs in one basket, so make sure you consider diversifying.

Monitor markets closely, and stay in touch with stakeholders, such as investors and

brokers. Make sure you communicate effectively, and always be straightforward and

honest.

And one final piece of wisdom: do not underestimate the value of personal networks.

Whether it means attracting capital, or finding deals, personal relationships and

networks are essential. As you try to grow your portfolio, you should also try to grow

your network. Make sure you develop strong working relationships with other managers,

investors, property owners, and others. At the end of the day, these personal

relationships can be as valuable as industry insight and financial capital.

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Robb KrautbauerOwner of Mountain View Investors, Inc.Located in Rio Rancho, NM

Robb has owned and operated Mountain View Investors, Inc. on a full time basis since 2011. Robb also owns a Real Estate Brokerage, Mountain View Realty, LLC. He has had his license since 2013. Robb has executed over 60 fix & flip, buy & hold and hard money loans since 2011 and has been involved in more than 100 transactions as a Realtor.

Mountain View Investors, Inc. is dedicated to the development of successful real estate solutions for both families and investors with expertise in all aspects of Real Estate. MVI specializes in purchasing homes at a discounted price and reselling them at below market value to homeowners and investors.

MVI is also a nationwide principal buyer of 1st lien performing and non-performing real estate notes. Purchasing both single and bulk transactions. Robb has assembled a team of professionals whose main focus is to quickly underwrite and close each and every transaction.

For the last three years, Robb has run a Million Dollar Friends and Family private equity fund. The core focus of the fund is purchasing bank and Government foreclosures to rehab and put back on the market. It is a huge success.

Robb has established many referral business relationships with diverse types of real estate investors and capital providers. He attributes his success to his creativity and persistence in problem solving.

Robb is active in both local and national mastermind groups and continues to invest in education in the Real Estate Investing space. Robb supports the St. Jude Children’s Research Hospital.