Real Estate Investing & Semi-Blind Pool Funds
In real estate, there are three primary ways you can invest. 1) You know the exact property you are investing in, like the shopping mall on 3rdStreet Promenade in Santa Monica at a specific address, 2) You don’t know the exact property or properties you are invested in, and you are part of a “blind fund” where the Manager makes all of the decisions on behalf of the investors and 3) You know some of the properties you are invested in, but you do not know all the properties you are invested in and like a blind fund, the Manager makes decisions on behalf of the investors.
The third option is called a “Semi-blind” fund and it is the focus of our blog post today. It is semi-blind because all of the properties that will be included in the fund have not been identified or acquired yet, but some have.
The first ingredient in a semi-blind fund is a Manager who makes decisions on behalf of investors. These Managers are typically real estate companies with a track record and a history of success. Most Managers do not start out creating funds, but build their track record by investing in single, identified properties with investors. Only after they have established a track record do they typically create blind or semi-blind funds. The second ingredient in a semi-blind fund is investors. Investors contribute capital to these funds, thereby entrusting the managers to source, acquire, manage and divest the fund’s investments.
In a semi-blind fund, the manager will identify one or more properties that are to be acquired. Sometimes these properties are already under contract and other times the Manger is still underwriting the potential acquisition. The manager also provides investors with a business plan that typically outlines the investment policy statement for the fund. This details exactly what the fund can and cannot invest in. For example, if you are investing in a fund with a mandate to acquire mobile home parks, the manager typically will not have the right (via the legal documentation), to start acquiring office buildings or retail strip malls. This ensures the investor knows exactly what types of properties may or may not be acquired under the confines of the fund.
What are benefits of semi-blind funds?
While semi-blind funds do not allow investors to have as much control as investing in specific properties, there are a variety of benefits
- Managers can act quickly – rather than raising money for each individual property, the manager has the ability to close “all cash” or allow for a shortened contract period so they can be more competitive when bidding to acquire new properties
- Leverage the “smarts” of others – Most managers who are creating funds have a long history of investing in real estate and investors therefore trust them to make buy and sell decisions on their behalf, contingent on the manager staying within the guidelines of the business plan. By giving this freedom to the Manager, the investor can leverage the expertise of the manager within their given real estate investments.
- Economies of Scale for Fund Startup Costs – Each time a new real estate fund is opened, whether for a single property or for a blind or semi-blind fund, there are startup costs including legal, accounting and other administrative costs. Semi-blind funds tend to raise more capital than single property funds, thereby allowing the manager to distribute those startup costs across a larger fund.
- Diversification – Because a semi-blind fund usually includes more than one property, the investor benefits from diversification across a variety of properties. Although they may all be within the same property class, office, for example, there is more diversification than investing in a single building.
- Diligence on the Properties in the Fund – Unlike a blind fund, there are some properties to underwrite when investing in a semi-blind fund. Investors have the ability to analyze those properties specifically and see if a pool of properties like those already under contract would meet their personal investment objectives.
In sum, there are advantages and disadvantages of semi-blind funds, just like there are for other investment vehicles. Although investors do not know all the properties capital is being raised to acquire, managers do have the ability to close on transactions quickly, without waiting to raise money first.
In a semi-blind fund, it is important for investors to do their due diligence not only on the properties specified, but also on the manager history and their business plan prior to committing any capital.