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Lisa Knee of EisnerAmper’s Real Estate Services Group outlines best practice in real estate in an evolving market

Real estate private equity funds continue to attract capital from a wide range of investors, but higher interest rates, distress in the system, and changing property dynamics require these funds to develop new strategies to achieve appropriate risk-adjusted returns in a more challenging investment environment.

When creating and running a real estate fund, there are several factors to consider. These include investment strategy, infrastructure, taxes, raising capital, property considerations, and planning for fund exit.

Structuring and tax considerations for real estate private equity funds 
Investing in real estate through a fund brings many compliance and reporting implications, and understanding the impact of tax regulations can be challenging. 

Some questions to consider include: 

• Should you structure as a joint venture or a fund partnership?
• What are the tax impacts on foreign investors?
• What are the tax benefits of real estate investment trusts (REITs)?
• Are there passive income considerations for debt funds?
• Why is unrelated business tax income (UBTI) a concern?

Emerging operational changes
Many real estate organizations are adopting new technologies to enhance the user experience.  AI-driven cameras can advance the video surveillance of assets and project more detailed images for digital tours. Once sold on the property investment, software aggregation tools like customer relationship management systems help organize decentralized teams more effectively. Volatile markets demand vigilance, adaptability, and technological developments, not only to bridge gaps in workflow, but to transform work systems to suit the modern age.

Property-level audits can show the accuracy of a property management’s accounting, so more managers are looking externally for such services. Real estate fund managers are increasingly outsourcing property accounting functions to streamline operations. Doing so can increase cost savings and standardize reporting. Fund managers are also implementing property-level audits for investment properties held by LLCs. This allows managers to compare financial records with properties across portfolios, as well as the net operating income used in fund valuations.

Winding down a real estate investment fund
Real estate funds operate with a limited lifespan and aim to return invested capital, along with potential profits, to investors. Careful planning is essential for a smooth and organized fund termination. 

Fund managers should communicate with investors and collaborate with service providers (e.g., lawyers and accountants). Transparency is key while developing strategies to realize remaining investments and identify contingent liabilities. Finally, it is wise to plan for termination-related filings and reports, such as audited financial statements and tax compliance documents. While these steps might seem obvious, when taken correctly, they can make for a successful investment.

Get the full insight 
It should be kept in mind while reading these insights that these perspectives on funds may impact your specific situation differently. It’s important to work closely with accounting, tax, and advisory professionals to determine the best course of action.

Lisa Knee
Managing Partner, Real Estate Services Group, EisnerAmper