Green Acres

November 1, 2006 2:32 PM

Real Estate Investment group. So I've been asked to take part in a real estate investment llc, and want to know what types of questions I should be asking. What I'd really like is some examples of other groups/companies and how they're set up and ran.

These are experienced people, so I'd like to avoid any comments about current bubbles, timing, what to invest in, etc. I just want to know how these groups can be structured, and what I should be asking going in. Focus of the group is single family residential, set up as an LLC, with 3 partners at the beginning. We have a property management arrangement in place. My current list of questions has to do with distribution of profits, exiting my position in the company, bringing others in at future points, etc. I'd love to see business plans, but the google search for "confidential" "do not distribute" and "real estate investment" did not reveal much, especially for smaller llcs and not reits. Thanks!

posted by striker to Work & Money (1 answer total)

In addition to the distribution of profits, inquire about management fees and what those cover. The managing partner may draw a small percentage of the assets under management to pay overhead costs and possibly themselves--ask what is and is not covered and whether the partnership can be charged for fees above and beyond the management fee for certain costs.

Ask if there is a preferred return for passive investors? These are pretty common.

Ask about tax distributions.

Ask about the appraisal process and your access to an appraiser's work. Make sure you understand any conflicts of interest and if you have the right to request audits and third-party appraisals. The appraisal process is especially important if new investors are brought in down the road and the fund has to go through multiple "closings" that involve market valuations of assets.

Ask about the key-man provision.

Is there an investment prospectus? If you'd like to see other examples, perhaps you can ask your attorney for prospectuses from similar partnerships with names redacted? Not sure if that'll fly.

Ask about the scope of investments (are they building new homes? buying and rehabbing? chasing after foreclosures?). If the partnership's expertise lies in building new homes, you wouldn't want to give it the flexibility to start rehabbing an old condo complex. Find out what the limitations are and how they're enforced. Find out if you can "opt out" of certain deals if they are out-of-scope.

Ask about UBTI and potential implications on this and other investments you have.

Ask your lawyer to read all the sub docs and bring up more questions.

IANAL. I've dealt primarily with private equity and venture capital funds, but I'm starting to learn more about real estate funds and have found a lot of similarities. The above are all things I've asked, been asked, or seen asked in relation to fund investments.
posted by mullacc at 3:03 PM on November 1, 2006