coll. - The US Private Real Estate Fund Compliance Guide

Published in May 2012 by PEI Second Floor Sycamore House Sycamore Street London EC1Y 0SG United Kingdom Telephone: +44 (0)20 7566 5444 www.peimedia.com 2012 PEI ISBN 978-1-908783-10-3 eISBN 978-1-908783-60-8

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Contents

By Doug Cornelius, Beacon Capital Partners, LLC

By Erik A. Bergman and Justin J. Shigemi, Finn Dixon & Herling LLP

By Charles Parsons and Stephen M. Meli, Proskauer Rose LLP

By Tamasin Little, SJ Berwin LLP

By Karl Ehrsam, Brian Ruben and Craig Friedman, Deloitte & Touche LLP

By Edwin C. Laurenson, McDermott Will & Emery LLP

By Joel M. Cohen and Anya R. Grossmann, Gibson, Dunn & Crutcher LLP

By Cary J. Meer and Deborah A. Linn, K&L Gates LLP

By Laura S. Friedrich and Zachary W. Bodmer, Shearman & Sterling LLP

By Anthony Conte and David Harpest, PricewaterhouseCoopers LLP

By Scott D. Pomfret, Highfields Capital Management and Matthew T. Nullet, PricewaterhouseCoopers LLP

By Nicholas Tsafos, EisnerAmper LLP

By John N. Marshall, Constantine Korologos and Lev Yagudayev, Deloitte Financial Advisory Services LLP

By Joel A. Wattenbarger, Ropes & Gray LLP

By Daniel New and Danielle Ryea, Ernst & Young LLP

Introduction

The Dodd-Frank Wall Street Reform and Consumer Protection Act in the US mandated many changes affecting financial service firms, including a requirement for hedge fund and private equity fund investment to register with the Securities and Exchange Commission (SEC). The effective date for the new registrants was March 30, 2012. Advisers to private equity funds making investments in real estate have been confronted with making what can be a complex factual and legal determination of whether they are required to register with the SEC. This publication, The US Private Real Estate Fund Compliance Guide, will provide a framework for the review of whether a real estate adviser is required to be SEC registered and regulated and then, if so, provide the necessary guidance for preparing and filing the Form ADV registration form with SEC and establishing the necessary compliance program.

The first chapter, SEC registration for private real estate advisers , works through an analysis of whether an investment adviser is required to register. The analysis starts with the Investment Advisers Act of 1940 (the Advisers Act) definition of an adviser as:

[A]ny person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities

The important issue for the real estate advisers is what is a security. This process involves complex legal determinations. And then the question is at what level of holdings in securities does an adviser reach the requirement to register. According to the Form ADV Part 1 registration form definition, a:

Real estate fund means any private fund that is not a hedge fund, that does not provide investors with redemption rights in the ordinary course, and that invests primarily in real estate and real estate related assets.

An initial examination point once the adviser determines to register is to establish written policies and procedures in a compliance manual (see chapter titled Setting up a compliance program ). The SEC recognizes that an advisers compliance program should be designed for the particular adviser, taking into consideration such factors as the size of the firm in assets under management, number of employees and offices, and the nature of the business and investments. The development of the compliance program should begin with a review of risk and an analysis of conflicts of interest. The information in the chapters Identifying and managing conflicts of interest in private real estate funds and Compliance for multi-strategy private real estate firms will help the adviser analyze those issues that should be considered as an important step in designing its compliance policies and procedures. For example, there is an inherent and possible conflict of interest a real estate adviser may face if a property owner has financial difficulties, or if the adviser holds a security in several funds with differing seniority rights.

Multi-strategy funds, which have become popular as advisers diversify their investment strategies to take advantage of opportunities resulting from the recent financial crisis, may be involved in potentially conflicting investment instruments including:

(i) Private real estate equity, including direct and indirect interests in real property.

(ii) Private real estate debt, including mortgage loans and mezzanine debt.

(iii) Public real estate equity, including securities related to real estate such as real estate investment trust (REIT) securities.

(iv) Public real estate debt instruments such as commercial mortgage-backed securities (CMBS) and collateralized mortgage obligations (CMOs).

Once an adviser is registered, it is subject to the same legal and regulatory requirements of any SEC registered adviser. The chapters Form ADV Parts 1 and 2, Marketing, advertising and fund solicitations for private real estate fund advisers