Strategies for addressing investor liquidity concerns and funding capital needs in real estate funds

Abstract

Purpose

To discuss issues that real estate fund sponsors may encounter due to investor liquidity constraints amidst the COVID-19 pandemic (such as investors seeking redemptions or transfers) and to provide guidance on potential ways that fund sponsors can prepare for, and respond to, such inquiries while at the same time addressing their fund’s liquidity needs (such as by utilizing subscription-secured credit facilities).

Design/methodology/approach

The article identifies the types of requests that investors may make to address their internal liquidity constraints, discusses contractual, legal, regulatory and business issues that fund sponsors should consider in responding to such requests and provides some alternatives for fund sponsors to consider allowing them to be responsive to investor liquidity concerns while also addressing fund capital needs.

Findings

The article finds that there are specific actions which fund sponsors should take in anticipating, and responding to, investor liquidity requests, such as reviewing partnership documents and credit facility documents and considering consequences in respect of ERISA, tax and compliance with applicable securities laws. The article also finds that specific affirmative actions by fund sponsors, such as increased borrowings under credit facilities, making distributions that are recallable and favoring transfers over withdrawals or redemptions may assist fund sponsors in preserving capital while addressing investor liquidity requests.

Practical implications

Fund sponsors should carefully review their fund documentation and determine their options and requirements as they pertain to potential liquidity requests. Fund sponsors should be careful to avoid foot-faults under their fund documents and credit facility agreements.

Originality/value

Practical guidance from experienced fund formation, securities law, tax, ERISA and finance lawyers.

Citation

Broderick, J.L. and Giles, M.L. (2020), "Strategies for addressing investor liquidity concerns and funding capital needs in real estate funds", Journal of Investment Compliance, Vol. 21 No. 4, pp. 193-202. https://doi.org/10.1108/JOIC-10-2020-0034