When to Raise Equity Capital In a Fund Structure

The operating entity is usually the face of the operation and family or entrepreneurially owned. Even though there is plenty of capital in today's hot real estate market, raising equity capital for smaller and midsized companies is a very arduous task. It is usually done on a deal-by-deal basis in the affiliated flow-through entities that own the individual properties. For example, an established medium sized West Coast-based CRE investment firm may have 25 or more different affiliated partnerships and limited liability companies that own CRE assets valued at $300 million, with an aggregate of $200 million in debt and $100 million in equity. The general partner or managing member of these entities and the operating company have to manage over time, 25 separate mortgages, equity offerings, private placement memorandums, partnership agreements, subscription agreements, etc. If the average equity investment is $250,000, then there are 400 separate investors in the 25 deals.

The question many of these smaller and mid-sized real estate firms need to ponder as their business grows, is when does it make sense to begin raising equity capital in a fund structure versus one deal at a time? A fund structure for equity capital is more efficient, less costly in terms of fees, documentation and legal costs and quicker to complete. Raising equity capital for 25 different projects one at a time may also lead to lost investment opportunities due to the inability of the general partner to raise the required equity capital quickly enough, to take advantage of good deals that require a quick close. If the general partner had a fund with a $100 million equity raise it could have placed all the properties in the fund within a one to two-year timeframe versus the six to 10 years, it may take to accumulate 25 separate real estate deals.