Matt Dickstein
Business Attorney
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39488 Stevenson Place #100, Fremont, CA 94539

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Private Real Estate Investment Funds

Article #2 – Legal Structure of the Fund

In this 6-part series, I explain private real estate investment funds. You have a real estate fund when you accept money from passive investors to do transactions in real estate. A real estate fund is a hedge fund and it is subject to most laws that apply to hedge funds, including securities laws and ERISA. Real estate funds usually are LLCs or limited partnerships, and they have complex terms for investor rights, manager compensation and more.

These are the 6 articles in the series:

  1. Overview
2. Legal Structure of the Fund  ◄You are here
3. Manager Compensation
4. Side Letters and Preferential Terms
5. Securities Law

In this Article #2, I talk about the basic documents and terms that make up a fund.  Specifically, I discuss: (1) your choice of entity; (2) the basic fund documents; (3) the term of the fund, that is, your deadline for returning your investors’ money; and (4) keeping control over your fund.  I discuss manager compensation in Article #3


Most funds are either limited liability companies or limited partnerships.  Both LLCs and LPs give limited liability protection to the investors, and both are tax pass-through entities.  The trend is toward LLCs but LPs work just fine. 

Fund Documents

The primary fund documents are:

1. The LLC Agreement (aka  Operating Agreement) or LP Agreement.  This document controls the relationship among the fund and its investors.  It contains the basic terms of the fund, including duration, control, management, manager compensation, distribution preferences, exits, etc.

2. The Private Placement Memorandum (PPM).  This document discloses material information about the fund to investors.  The PPM is a disclosure document required under securities law.

3. Various subscription documents, including the Investor Questionnaire. 

4. Side letters; see Article #4.

Term of the Fund; Return of the Investors’ Capital

Here is the problem: your fund is not a mutual fund and you lack the liquidity to return an investor’s capital at will.  Nearly all of your investors’ capital will be tied up in investments.  This means you must liquidate investments to return an investor’s money – which may be impossible or disastrous.  From an investor’s perspective, however, they won’t trust you with their money for an indefinite term.

Solution: To solve this dilemma, you might write into your LLC Agreement a deadline for the return of the investors’ money.  For example, you might provide that the fund will liquidate all investments and wind down by some date certain, e.g. two years after formation for a flip fund.  Now of course you must restrict your investments to deals from which you can exit within two years.  For a buy-and-hold fund, you'll need a longer term (perhaps with provisions for refinance at the end).  I usually write in provisions that let the managers extend the term for a few months to effect an orderly liquidation of assets.


Your investors are passive, which means they should not have operational control.  Instead the fund’s managers control the fund.  The investors retain overall control only through their ability to replace the managers, and perhaps through certain specified veto rights. 

A veto right is a right held by the investors to block certain specified actions, for example, amendments to the charter documents; affiliate transactions; dissolution; etc.  The investors as a group exercise a veto right by the votes of a certain percentage of ownership (for example, 51% or 75% of the membership interests).

I discuss the most interesting term in the fund documents, manager compensation, in Article #3 next.

Get a Lawyer

Real estate funds, like all hedge funds, are very complex.  This is not something to learn as you go.  You need the help of accounting, tax and legal counsel who are experienced in the area.

Call me to schedule a legal consultation: 510-796-9144

Matt Dickstein, Business Attorney - 39488 Stevenson Place, Fremont CA 94539
(510) 796-9144

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