Sage Advice For Someone Who Wants To Start A Property Fund

It was a rainy morning at LCN’s Global Headquarters, and I was preparing myself for a call with a “first timer” who had submitted an enquiry through our website about setting up a property fund.

This guy had completed the information form that we send to everyone with this kind of enquiry, so I had a basic understanding of his background in construction and property development and his potential funding sources. I also knew, a few minutes into our call, that like so many other people we come across, he was fed up with property owners, banks and bridging lenders taking the lion’s share of the profit he helps to create.

Here’s a quick summary of what I said on that call – in case it’s useful for anyone you know.

It’s certainly possible to set up a fund. There are plenty of tried and tested structures. Launching a fund from scratch is relatively expensive because of the number of hoops you have to go through: regulatory strategy and compliance, legal structuring, tax structuring and so on. In general, financial services legislation imposes the most demanding obligations in relation to investment opportunities which are to be offered to consumers (aka ‘retail investors’). Funds for professional and institutional investors are somewhat less regulated, but there are still important restrictions. The regulatory issues affect how you can promote the fund, who you can promote it to, the process of on-boarding investors, how the fund is operated, and how cash and assets are safeguarded.

If you don’t already have potential investors lined up, then fundraising costs may be more significant than the structuring and set-up costs. There are lots of people out there who can help. At one end of the scale, there are brokers and intermediaries, though some of these are operating illegally, because they are carrying out regulated activities without the necessary licences. At the other end of the scale there are placement agents and corporate finance boutiques. They are all expensive, because they are ultimately delivering the goods you want.

The absolute starting point is to have a clear vision of the long term result you want to achieve. Is it to create a portfolio of interests in property? Is it to build up a track record as an asset manager, with an income stream related to the assets you manage? The answers to these questions will help shape the commercial structure of what you do.

When you have a defined end goal, it is time to think about how to get there. There are other ways of achieving a similar result to a fund, which do not necessitate the same levels of cost and regulatory compliance. Joint ventures and self-managed syndicates are good examples. Essentially, you are just pulling together three elements: (1) the property, (2) funding, and (3) skills.

If you want to get started quickly, and begin to create a track record, the best approach usually is to stop thinking in terms of a fund, or crowdfunding, or mass marketing in any form. It’s usually better to think in terms of a small number of investors (or maybe just a single investor), each contributing a relatively large amount. And it’s definitely better to talk in terms of ‘joint ventures’ and ‘business plans’ rather than anything which might give the wrong impression that you’re offering a financial product. A general concept is good, but ultimately you’ll need a specific project, with a specific proposal as to profit split and fees. Make sure that there is enough upside in it for you personally in terms of fees and profit share – if the projects you work on are too small, you can find yourself doing a lot of legwork and shouldering a lot of the burden, without much reward.

Once you have a specific project and firm interest from a prospective funding partner, then you can work on the structure – so that you’re not falling foul of the regulatory issues, and you’re dealing with tax issues appropriately. We don’t advise on tax ourselves, but we’re more than happy to talk again when you’re ready, and help you to pull together the overall team.

By the way, we publish a guide on self-managed syndicates, which is available here, and a checklist and heads of terms for a property development joint venture, which is available here. You may find them useful.

We also have a toolkit to help you in the early stages of negotiations. It includes a template confidentiality and non-circumvention agreement. For more information, email us at info@lcnlegal.com.