For individuals considering a real estate investment, there are a variety of structures through which they can deploy capital.  For example, a property can be purchased directly in the name of an individual or through a  Limited Liability Corporation.  But, for individuals seeking the benefits of real estate ownership without the time commitment needed to manage it, there is a third option, a private equity real estate partnership.  

What is a Private Equity Real Estate Partnership?

To define private equity real estate partnerships, it is helpful to break the term into two parts.  First, a “private equity” firm is a specialized type of investment manager that provides financial backing or invests in the non-publicly traded securities of startups or operating companies.  These investments can span all industries, including real estate.  Second, a “real estate partnership” is a legal investment structure that combines the liability protection of a corporation and the tax benefits of a partnership.  

Putting the two together, a private equity real estate partnership is a specialized type of investment structure that invests in the non-publicly traded securities of a company that owns real estate.  In many cases, the private equity firm will find a property and create a limited liability corporation through which to purchase it.  To fund the acquisition, they will contribute a portion of their own funds, usually 10% – 20% of the purchase price, and sell securities to investors to raise the rest.  

To facilitate this transaction structure, private equity firms rely on an exemption that allows them to sell the company’s securities to investors without having to register the offering with the Securities and Exchange Commission (SEC).  However, this same exemption limits who can purchase the securities.

Who Can Invest in a Private Equity Real Estate Offering?

SEC exemption rules limit investors to those who are deemed to be either “accredited” or “sophisticated.”

Under SEC Regulation D, an accredited investor must meet one of two requirements:  

  1. Net Worth:  Individual net worth, or joint net worth with an individual’s spouse in excess of $1,000,000.
  2. Income:  Individual income in excess of $200,000 in each of the two most recent years or joint income with an individual’s spouse in excess of $300,000 in each of those years with the reasonable expectation of reaching the same income level in the current year

If an investor does not qualify as accredited, they may still be able to invest in a private securities offering if they can prove that they are “sophisticated.”  Under SEC Regulation D, a sophisticated investor is one who  “has sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.”

In both cases, the intent of the rules is to limit investors to those who have the financial capacity and/or the knowledge necessary to understand the risks and benefits of investing in non-publicly traded securities. 

Benefits of Investing in a Private Equity Commercial Real Estate Partnership

For investors seeking the benefits of real estate ownership without the hassle of managing it, a private equity commercial real estate partnership comes with a number of benefits:

  • Leverage:  By partnering with a private equity firm, an individual investor can leverage the firm’s network, tools, technology, and expertise, all of which are used in service of finding the most profitable investment opportunities.
  • Quality:  Because a private equity firm pools investor funds to facilitate the purchase of an asset, it gives each individual fractional ownership of an institutional quality asset that likely could not afford on their own.
  • Income:  By definition, the real estate assets owned in a “commercial” real estate partnership are rented to other businesses to generate income for investors.  By virtue of their investment, individuals are entitled to a portion of the income and profits produced by the underlying asset, resulting in a steady stream of dividend income.
  • Diversification:  Real estate price movements tend to have a low level of correlation with publicly traded securities.  As such, private real estate provides a layer of diversification for the traditional stock/bond portfolio.
  • Incentive Alignment:  In most cases, the return structure in a private equity commercial real estate partnership is designed to align the financial incentives of the manager with those of the investor.  Usually, this takes the form of a “preferred return” for investors, which means that the manager’s access to property income is limited until the investors have received a certain return on their money.
  • Time:  By investing with a private equity firm, investors outsource the task of property identification, acquisition, and management to a third party (the private equity firm), freeing up their time to pursue other interests.  

While the benefits are impressive, a private equity commercial real estate investment is not risk free.  Like other assets, real estate is vulnerable to changes in economic conditions and returns can suffer as a result.  In addition, the investment may be illiquid during the 5-10 years that it takes to implement the property’s business plan and fees charged by the manager may erode overall returns.

Even with the known risks, private equity commercial real estate partnerships can be a suitable option for accredited and/or sophisticated investors looking for access to institutional-quality commercial real estate assets.

Interested in Learning More?

First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.

To learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.

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