Jun 27, 2024
People ask me all the time, “how much does it cost to set up a real estate fund”? It can vary considerably based on a number of factors and really depends on the manager, the situation, the choice of legal counsel, the scope of materials desired, and more. The short answer is that I have seen it cost (all-in) anywhere from as little as a few thousand dollars to as much as $250,000. I believe that a qualified manager can put together the necessary set of materials and assemble a very high quality product from somewhere between $25,000 and $50,000. This would include consultation of structure, complete offering documents, including legal review, marketing materials, and initial administrative and filing costs (but not ongoing fund operating costs).
One of the largest initial costs associated with starting a Regulation D 506 real estate fund is legal fees. These fees cover the drafting of the private placement memorandum (PPM), subscription agreements, regulatory filings, and other legal documents required for compliance with securities regulations. Depending on the law firm chosen, these costs can easily get out of control (and often do) without concomitant value to the manager. I could relay many specific situations I’ve encountered with managers over the years – honestly I have lost count – who have spent $100,000 or more in legal fees for fund documents they do not really understand (or know why they are structured the way they are) and ended up never even launching the fund. Utilizing competent securities counsel is a must (and table stakes to starting and running a fund) but making the right choice of counsel for you is critical to both containing costs and to getting the right fund structure in the first place. The cost for this service should be included in my range above.
Marketing materials, website development, and other initial administrative costs also contribute to the overall expenses of setting up a real estate fund. These materials are essential in today’s digital world for attracting investors and for ensuring compliance with regulatory requirements. This can also cost a great deal of money and I have seen managers pay tens of thousands of dollars for marketing materials, pitch decks, PowerPoints, websites, and other materials. Engaging resources who understand the industry can help avoid excessive costs for time spent by them learning the business as well as ensuring compliance with securities laws (which should then be confirmed by your securities counsel before using). There are many such resources out there specific to the industry and this is an excellent point for managers to inquire about and verify before engaging one. This cost is also included in my range above.
Ensuring compliance with securities laws and regulations is essential for the success of a Regulation D 506 real estate fund. Although not considered a start-up cost, there will be ongoing compliance costs to operate the fund which will include ongoing legal expenses, regulatory filings, maintaining accurate records, and more. And these rules are continually changing so you will need to be able to stay on top of these changes and be able to comply with them. In addition, the Securities and Exchange Commission (SEC) charges filing fees for Form D filings, and state regulators charge fees for the so-called “Blue Sky” filings that must be made in the states where your investors are located, all of which is necessary for Reg D offerings. These fees can vary depending on the total amount being raised by the fund, the number of states in which your investors reside, and more. Initial filing fees are included in my range above, but ongoing costs as the fund grows are not.
Finally, hiring accounting professionals to manage financial reporting, handle investor allocations, prepare and file fund tax returns and K1s, and/or conduct audits is another ongoing cost that fund managers need to think about and budget for when starting a real estate fund. Some of these (for example filing tax returns and producing K-1s) are required and others are at the option of the manager, but they are all important to the potentially successful operation of a fund and in inspiring investor confidence. The cost of these will vary considerably based on fund type, size, scope, choice of providers, etc. Some of these costs are borne by the fund and some may be borne by the manager, depending on manager choice and how the offering documents are drafted. These costs are not included in my range above.
To summarize, any manager who wants a quality set of necessary materials to start a fund should expect to spend between $25,000 and $50,000 at the outset to get everything set up properly. This budget should give you a quality set of materials for getting your fund off the ground. The manager should also establish a budget for ongoing costs as described above. It is important for managers to prepare a quality fund financial model to understand what they expect the fund performance to look like, which of course will vary based on their asset model and financial assumptions, which should include the expected costs of operating the fund. Managers also should plan for which expenses would be borne by the fund itself and which services and expenses will live with the manager operating entity. This can also vary considerably, and I will address in more detail in another article. In the meantime, I hope this helps aspiring managers understand what they might expect and helps them avoid unnecessarily busting their budget.
Nothing in this blog is or should be construed as investment advice or an offer or solicitation of offers of investments. Both Real Estate Investments and Securities offerings are speculative and involve substantial risks. Risks include but are not limited to illiquidity, lack of diversification, complete loss of capital, default risk, and capital call risk. Investments may not achieve their objectives. Investors who cannot afford to lose their entire investment should not invest in such offerings. Consult with your legal and investment professionals prior to making any investment decisions.
