Hedge Fund - Real Estate Investment Trusts

[Trenton Parks]

Has anyone ever tried to set up a REIT or a Real Estate Hedge Fund before? I am looking for someone who has experience setting this up and who can give me guidelines as to what the SEC will regulations are and good recommendations for accountants/attorneys/financial planners who can assist in the process.

Thanks for your help BP community!

[Karen Margrave]

Each state probably has their own criteria, etc. so you will want to find someone in your specific region. You might want to ask Bryan Hancock he's very knowledgeable on that stuff. Also, @Bill Gulley might know too.

[Trenton Parks]

Karen thanks for the insight. I live in Billings, Montana. However our state for the Trust/Fund itself would be in Indiana. So hopefully that helps add a little more information.

[Karen Margrave]

Trenton Parks Welcome to BP! Sounds like you intend to get busy doing some deals. Have you filled out your keyword alerts yet? If not you might want to with the area you're interested in and subject matter, etc. that way you will be notified when it's being discussed on a forum. Also, still check with Bryan, also @Brian Burke (don't know why his wasn't highlighted!) as well as Bill Gulley

[Bill Gulley]

Set up a hedge fund? No, never considered anything as complicated as I'm not connected with 500+ million.

A REIT, yes, I did look into it and there was too much brain damage involved, if you have 50K initially for due diligence, legal drafts, bonding, SEC requirements, getting underwritten and connected with a brokerage, go right ahead. Not that 50K will cover it by the time you get to approaching investors either..... :)

[Trenton Parks]

Thanks for the welcome! I have not set up my key words yet. I have done some deals here locally but am going to be branching out! Kind of a rookie question but how do you set up the key words? Just under account settings or something?

Hey Bill, yeah there is some brain damage but I think it will be well worth it in the end. Between my partner and I; we do have the funds to get the due diligence, legal , and etc. started. I will send you a message with my contact information and see if we could arrange a time to chat over the phone!

[Tammy Roulund]

Trenton Parks have you been successful in setting up your fund?

[Trenton Parks]

Not yet, have some other projects occupying time.
I have talked to a few more lawyers and a great recommendation that is a financial planner who has a different way of setting this up through a Delaware Statutory Trust

[James Olson]

There are entities you can set up that do not require SEC filings. You can raise up to 5 million. It's called a private placement memorandum. You have to do some initial work (should be under 10k) and are limited to mostly sophisticated investors.

[Bryan Hancock]

There are a ton of new securities law items to consider with this question. I could literally write a small book with my response so it would be helpful to know what you're trying to do. A "fund" generally means that your intention is to do a blind pool investment where investors will pool money and you'll control it. This is materially different from a single-purpose syndication for a particular deal and the complexity is an order of magnitude more complicated.

Financial planners will add zero (dare I say negative) value in the process. What you need is a good securities attorney that knows tax law. I have a few recommendations that I am happy to share, but it will be easier to steer you in the right direction if I know what you're trying to do. With the new laws setting up a fund with a 506(c) exemption will allow you to generally solicit for accredited investors provided you take "reasonable steps" to verify they're accredited. This gets quite technical quickly and the decision of what exemption to select will depend on a number of factors:

1. Who you can attract capital from

2. Where the folks you attract capital from reside (their state, whether they're domestic or international, etc.)

3. If your investors will be accredited, non-accredited, or some combination of these two

4. If your investors will all be in your home state or they'll be in multiple states

5. The level of sophistication of your investors (Know thy customer)

6. How you intend to attract investors (privately via a PPM or publicly via an offering circular under the new laws)

Also, a "hedge fund" implies that you have a strategy that is counterbalanced in some fashion. If you don't intend to blend strategies to hedge risk then you're probably considering a private equity fund with a stated purpose/goal.

Operating agreements in funds that take in dollars from passive investors are much more complicated than agreements for single-purpose transactions and they need to be crafted by a securities attorney who specializes in this type of law. There are literally hundreds of forks in the road from setting it up properly and even some slight issues can cause you problems for years to come in your agreements. This is not a do-it-yourself type project and you need specialists. I'll stop typing for now though so you can provide feedback about what your'e trying to do.

[Riley F.]

@Trenton Parks

Can I ask why you'd like to set up a RIET or hedge fund in the first place?

[Trenton Parks]

@Bryan Hancock hit the nail on the head.

Riley in response to your question we were looking to do this because , "The intention is to do a blind pool investment where investors will pool money and you'll control it."

After going through the hoops Bryan was referring to we had decided it would be best to do a smaller form LLC in the interim and build it towards the goal of converting to a fund eventually.

[Riley F.]

I would reckon that even an LLC is somewhat of a head ache from a regulatory perspective - you will need an attorney to draft a PPM, also I believe you will technically become an investment adviser so far as The Investment Advisers Act of 1940 is concerned, and probably an investment manager in the scope of The Investment Companies act of 1933. This will likely have to be a Reg D offering if you plan to do any marketing at all. My $0.02, if you don't already have in excess of $1mm in assets under control, which is not a ton, you may be better off just building your track record rather than raising money. My reason for that is, the fixed costs of launching such a vehicle can be crippling for a small investment pool to overcome.