I read the article "Equity Investment in Real Estate Development Projects: A Negotiating Guide for Investors and Developers" (link inside post) which is a bit dated but was pretty useful.
I'm getting the impression that REPE funds don't play a very big role in the development process when they have a developer partner. So what else exactly does a REPE fund do after they have invested in a development project?
It seems like investors are paying a lot of fees here. 1.5/20 to the REPE fund, development fees, cash flow splits with the developer, etc. What are the expected returns for LP investors after everyone gets their piece of the pie?
Your impression that a fund doesn't play a big role in the development process kind of misses the point of the developer GP/fund LP relationship. The fund manager's expertise should be deploying capital into the right deals given its investment criteria. After the fund manager invests in a development project, it goes on to find the next deal to fund with its investors' capital...
If the development deal goes according to plan, the developer is supposed to take care of the rest and get paid its fees and promote in exchange for managing the project. The fund manager participates by monitoring the deal and making major decisions alongside the developer (e.g., when to exit the investment).
The REPE fund gets paid for knowing what developers are of institutional quality and what asset class and geographies they should target.
In fact, to take it to the extreme, the developer does not WANT the REPE fund to have much of a role after closing.
If you're selling your name to a developer as their potential capital provider, you don't want there to be much to talk about if they ask about your role during construction.
This. Typically, developers do not want LP investors to be actively involved within the development. There's just too many cooks in the kitchen. This is obviously firm specific (for both the GP & LP). I have seen both active LP investors and passive LP investors. My firm prefers the latter as we are very confident in being able to mitigate risks on our own and have the bandwidth & vision to bring a development to fruition.
There are obviously benefits of having the LP play certain roles within the development. To name a few, they typically have deep relationships with brokerage houses, access to market data, and can throw around their firm's name to get better pricing / terms with brokers, lenders, and any other players within the industry. Some LP investors are very active and have there own in-house development team. This could be a double edged sword, for reasons stated above.
-REPE primary function is an investment manager. Provide real estate exposure to portfolio managers of pension funds, endowments, and other institutional investors -Once capital is allocated, it is more oversight of the project. Providing help where needed. Project memos to investors, Asset Management, etc. -Our funds (mix of Value add, Opportunistic, Development) target 18% net of fees
-As someone mentioned above, I sit on a development team within our firm. If opportunity is in a market we have expertise and an asset class we are seasoned in (dev through operating) we will do the deal ourselves. If and when possible we want control of our projects. -If opportunity looks good but is outside our comfort zone (i.e unfamiliar market or asset class) we will still try to negotiate co-development position. -For our firm, LP positions are of last resort
I wish all questions came with answers like this. Cap, bravo.
Ton of good info in this thread AndyLouis
Yep. Good stuff guys. Thanks.
thanks for heads up, will frontpage today
What would you all say about something like, Carlyle Group, CIM Group, Related?
Carlyle has many active RE people in their group, from analyst to Asset Management; do they simply vet a deal, deploy capital, then monitor to ensure their terms of the partnership are being met, basically as described above being a passive LP?
Compared to a group like CIM, who actively manage funds with a couple billion AUM; would you consider these guys more of LPs and GPs under one roof?
Then you have groups like Related or Hines who also manage funds and have enormous balance sheets, but are better known to be 'developers;' would these guys be classified straight GPs who go in with a large GP equity interest?
Companies have different internal workings, but within mega-developers like Related or Hines there are investment teams and development teams that serve as the different "parties" described in this thread.
In regards to development, Carlyle is a very active participant in the process, and they generally vet all medium to large decisions. As an example, for MF deals, they will dial in on calls to discuss a property's lease up strategy with property management, discuss marketing plans, weigh in on finishes and amenity programming, and any number of other decisions.
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