Commercial Investment Real Estate January/February 2017

amount of capital invested by the fund. Distributions typically follow the traditional private equity structure, in which investors receive a return of their capital plus a preferred return, and any profits remaining after the payment of the preferred return and the return of capital are split between investors and the sponsor pursuant to a predetermined formula. Fees and Decision-Making. These sponsor equity opportu- nities are attractive to investors because they typically share in the promote distributions. Investors in sponsor equity, however, generally do not share in fee income, which is the management fee, received by the sponsor. These fees are usually paid as com- pensation for services, such as property management, leasing, or financing, provided by the sponsor or its affiliates. Since investors in the underlying real estate project are depending on the sponsor to make all management decisions, including those related to the services described above, investors in sponsor equity are offered limited, if any, decision-making rights. Advantages and Constraints. Given the economic advan- tages of investing in sponsor equity, including more favorable returns as compared to a typical real estate investment, what constrains a sponsor’s ability for this investment opportunity? Primarily investors have grown accustomed to sponsors contrib- uting a significant portion of the required capital. Syndication of Sponsor Equity. Accordingly, if a sponsor intends on syndicating the sponsor equity for a particular proj- ect, the syndication should be disclosed in the offering docu- ments. Some investors may worry that as a sponsor syndicates its required capital contribution, the sponsor may make riskier decisions because less of its capital is at risk. However, even if a sponsor has less capital at risk, it has an incentive to make sound decisions because of its desire to raise more funds for future projects. Also, sponsors will only realize a return on a project if it becomes profitable. Balancing Concerns. Sponsors will need to balance these concerns and work with their investors to ensure that all par- ties involved are comfortable with the amount of sponsor equity that will be provided by investors that are not affiliated with the sponsor. When the balance is achieved, investments in sponsor equity may be a great opportunity for both capital-constrained sponsors and investors. Jeffrey M. Friedman is a counsel at the national law firm of Fox Rothschild LLP in Chicago. Contact him at jfriedman@ foxrothschild.com. Andrew M. Halbert is an associate at Fox Rothschild LLP in Chicago. Contact him at ahalbert@ foxrothschild.com. Visit https://TheAnalystPRO.com/CCIM to activate your FREE TheAnalyst ® PRO account today! INTRODUCING TheAnalyst PRO ® CCIM INSTITUTE’S NEW AFFINITY PARTNER Take advantage of the latest analysis technology for cloud and mobile. As a CCIM, you get 7 FREE tools within TheAnalyst PRO: • • • • TVM IRR / NPV CAP Rate Cash-on-Cash • Mortgage Calculator • Distance Measuring Tool • Target CAP Rate Analysis CCIM members receive 20% OFF a subscription to the full application! Activate Your FREE Account at https://TheAnalystPRO.com/CCIM Responsive Design for Desktop, Tablet and Mobile Devices © Copyright 2016 CRE Tech, Inc. CCIM.COM January | February 2017 17

Commercial Investment Real Estate January/February 2017 | Page 19