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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:
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-à-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 | 