Deal terms and interests in the Real Estate Indirect Investment Industry: RELPS' structure and strategy

The paper aims to go into detail on the Real Estate indirect investment industry and to provide a study of investment fund structures as well as an analysis of the impacts on investor returns based on the three investment styles (Core, Value-add and Opportunistic). The main legal structure used in indirect Real Estate investments is the Limited Partnership agreement (RELP) whose roles are analysed, the Limited Partner (or fund investor) and the General Partner (or fund manager). The focus then shifts to the financial due diligence carried out by investors before subscribing to an investment fund, analysing the cash flow variables according to investment styles. The main focus is on the impact of base management fees on investors' returns (the Limited Partner) and, subsequently, when and how the performance fee mechanisms are applied once a level of the fund's target return is exceeded. Then, the paper examines some market standards provided by industry associations which play mainly the role of increasing transparency within the non-listed real estate vehicles market and supporting investors' decision making in the due diligence and subsequent performance monitoring phase. The analysis is supported by the set-up of financial models, indirect investment cash flow and Waterfall models in the case of Performance fees, to analyze the impacts on investor returns. In addition, interviews have been conducted to verify the results and provide opinions on the issues addressed. At the end of the analysis it can be seen that the limited partnership is the half-way structure between the partnership and corporation, enjoying most of their advantages, while avoiding most of their drawbacks. Secondly the management fees are not one of the main drivers in the choice of an investment fund. Lastly, the analysis shows how post-hurdle split levels have a significant impact on the General Partner's performance.