Financial Planning - - SPECIAL REPORT: REAL ESTATE -

How it works: While there are thou­sands of real es­tate fund man­agers whom ad­vis­ers can work with, “it takes time and a ded­i­cated ef­fort to find man­agers whose strate­gies are most suit­able to meet clients’ needs and goals,” Derek New­comer says. “The ad­viser needs to en­sure that a client [is qual­i­fied and willing] to in­vest in an illiq­uid in­vest­ment strat­egy such as pri­vate real es­tate.

“Some man­agers have very high min­i­mums,” New­comer ex­plains.”we have been suc­cess­ful in ne­go­ti­at­ing min­i­mum in­vest­ment sizes for our clients so that we can ob­tain greater adop­tion from a wider uni­verse of clients.”

New­comer’s firm, Bea­con Pointe Advisors, places clients in part­ner­ships with such firms as Kairos In­vest­ment Man­age­ment, South­west Value Part­ners and Buchanan Street Part­ners, which in­vest in a wide va­ri­ety of prop­er­ties, in­clud­ing of­fice build­ings, mul­ti­fam­ily prop­er­ties, in­dus­trial prop­er­ties and re­tail as­sets.

An in­ter­nal com­mit­tee at Bea­con Pointe de­ter­mines a client’s ap­pro­pri­ate as­set al­lo­ca­tion, usu­ally no more than 10%, be­fore in­vest­ing in a part­ner­ship, New­comer says.

In­vest­ment man­agers typ­i­cally charge a 1% to 2% man­age­ment fee on ei­ther com­mit­ted or in­vested dol­lars, as well a per­for­mance fee of 15% to 20% af­ter in­vestors have re­ceived their orig­i­nal dol­lars in­vested and an 8% to 9% pre­ferred re­turn.

“Some funds are struc­tured dif­fer­ently,” New­comer says, “so it is ex­tremely im­por­tant to un­der­stand how fees are gen­er­ated and what the fund pays out to the man­ager as fee in­come.”

Up­side: Dis­tri­bu­tion of in­come: Bea­con Pointe tar­gets ap­prox­i­mate to­tal re­turn com­bin­ing in­come and profit to around 12% to 15% over the life of the fund.

Risks: In­vest­ments could be illiq­uid for up to 12 years.

“Frac­tured man­age­ment teams can lead to trou­ble, par­tic­u­larly when you are in a long-du­ra­tion life fund that can last 10-plus years,” New­comer says.

“Poorly man­aged as­sets can lead to in­creas­ing costs and de­creas­ing in­comegen­er­at­ing ca­pa­bil­i­ties.”

The man­ager may also uti­lize too much debt when ac­quir­ing a prop­erty, be­come too re­liant on one ten­ant or con­cen­trate hold­ings in one ge­o­graphic re­gion. What’s more, a part­ner­ship may col­lapse as a re­sult of fraud, dis­agree­ments within man­age­ment or other rea­sons.

“Ad­vis­ers should thor­oughly re­view the fund of­fer­ing doc­u­ments to fully un­der­stand what the con­se­quences of such an in­ci­dent would have on un­der­ly­ing in­vestors,” New­comer says. “Cer­tain clauses within the of­fer­ing doc­u­ments will out­line what would hap­pen should such an event take place.

“There may be ar­bi­tra­tion clauses, me­di­a­tion, or as­sets may be placed into a liq­ui­dat­ing trust,” he says. “In­vest­ing with the right man­age­ment team that has a long his­tory of work­ing to­gether suc­cess­fully can help to min­i­mize such an event.“

Charles Paik­ert is a se­nior edi­tor of Fi­nan­cial Plan­ning. Fol­low him on Twit­ter at @paik­ert.

It is ex­tremely im­por­tant to un­der­stand how fees are gen­er­ated in pri­vate part­ner­ships, says Bea­con Pointe’s Derek New­comer.

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