Matt Dickstein
Business Attorney
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39488 Stevenson Place #100, Fremont, CA 94539

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Private Real Estate Investment Funds

IMPORTANT NOTE -- I am not an ERISA lawyer and I know next to nothing about ERISA.  I make this article available to you to make you aware of ERISA, but you'll need to talk with an ERISA lawyer before taking any action.

Article #6 – ERISA

In this 6-part series, I explain private real estate investment funds. You have a real estate fund when you accept money from passive investors to do transactions in real estate. A real estate fund is a hedge fund and it is subject to most laws that apply to hedge funds, including securities laws and ERISA. Real estate funds usually are LLCs or limited partnerships, and they have complex terms for investor rights, manager compensation and more.

These are the 6 articles in the series:

  1. Overview
2. Legal Structure of the Fund
3. Manager Compensation
4. Side Letters and Preferential Terms
5. Securities Law
6. ERISA       ◄You are here

In this, my last article in the series, I turn to another massive body of law and regulation – ERISA.

No Fear, Except for ERISA

Fund managers fear the Employee Retirement Investment Security Act of 1974.  ERISA might apply if you take money from pension plans or IRAs.  ERISA is extremely onerous, and the tax code enforces it with taxes and penalties for violations.

25% Limit 

A hedge fund can avoid ERISA if it limits the level of investment by "benefit plan investors" to less than 25% of any class of the fund’s equity.  Benefit plan investors include employee benefit plans and IRAs.  Benefit plan investors do not include investments from the fund manager or any of its affiliates.

25% Applies to Classes of Equity

The 25% test applies to each class of equity securities, not to the fund's equity as a whole.  For a hedge fund with multiple classes, a relatively small investment by benefit plan investors vis--vis the fund as a whole could nonetheless constitute 25% or more of a particular class of shares, triggering ERISA. 

Even though your fund might only have one named class of securities, be mindful that differences in voting, liquidity, fees, information, "new issue" purchase rights or other rights among the investors might create a different class by operation of law.  Side letters that give special rights to some investors might also create a separate class. 

Continuous Monitoring of the 25% Threshold

The fund must continuously monitor and maintain the 25% threshold, including for every new investment and for share redemptions.  Many funds reserve the right to forcibly redeem a benefit plan investor's interest to the extent necessary to ensure that the fund stays below the 25% threshold.

ERISA is serious business.  If you worry that ERISA might apply to your fund, consult with an ERISA expert immediately.  Please know that I am not an ERISA expert and I know very little about ERISA.  My only goal in this article is to alert you to the issue of ERISA for your real estate fund.

Get a Lawyer

Real estate funds, like all hedge funds, are very complex.  This is not something to learn as you go.  You need the help of accounting, tax and legal counsel who are experienced in the area.

Call me to schedule a legal consultation: 510-796-9144

Matt Dickstein, Business Attorney - 39488 Stevenson Place, Fremont CA 94539
(510) 796-9144

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