I have been visiting this forum for a few months now and see the term AUM everywhere, but it seems different people have different definitions. From my understanding, CRE AUM isn't as easy to understand compared to a hedge fund's AUM. I have listened to podcasts where CRE operators are saying they have bought properties worth $200m and they add that to their total AUM count, even though they used LPs and debt. Would AUM just be the amount you actually put into that $200m building to purchase it?
For example, let's say you are working at a CRE investment firm and they raise a $100m fund. The firm buys 3 assets worth $500m each via 95/5 JV and debt. Would the firm's new AUM be $1.5 billion + whatever fund dry powder amount? Or would their AUM still be around $100m since they don't own 100% of that building due to LPs and debt?
Good question that is definitely worth some clarification! I hope this helps. AUM stands for Assets under Management, and the key term is going to be assets. On a GPS books, they’re going to put down the full asset value under assets- in your example, all $1.5B. The LP capital, and debt would both be on the opposite side of the balance sheet under liabilities (debt) and equity (minority interest). It’s the key term used because almost all RE deals include at least 50% debt, and many include other terms of equity in the capital structure. AUM is largely going to reflect the amount of capital a firm is capable of taking care of. In the HF example, most of those companies should be quoting AUM as well, because they’re not entirely their equity - they may have raised money from other parties, etc. cheers!
Thanks for this. Just to be clear, you are saying that in the above example, the investment firm would have an AUM of $1.5 billion?
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Correct!
Is AUM only purchase price based or updated with actual valuations? Assume its purchase price based as its more beneficial to funds (even tho I am not sure it should be done that way)
I can only speak from personal experience, but my company updates based on changing valuations. We pull from our REO.
It's probably based on all-in cost at closing (so, purchase price + any capex work you're doing). The logistics of continually marking your asset would be challenging, and have some real downsides. Like, this is stuff that the Trump Organization is currently being blasted for doing.
If you run a fund, what is the upside to inflating the value of the assets you own. Assuming you aren't a crook, you're going to be showing those updated valuations not just to potential investors or lenders, but also the taxman. Which means higher property taxes, which no one ever wants. And what do you get out of it? All that your investors care about is the return at the end of the day, so the only appraisal that matters is the one being done by the eventual buyer. The lenders don't care either, as long as the debt service is being paid. The only real reason to mark up your AUM is to boost your own ego.
Also, when do you mark? Every year? Every quarter? Just a massive headache.
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