Sponsors of private real estate funds may be subject to new federal registration requirements because of recent regulatory changes effected by the Dodd-Frank Act and companion SEC regulations.
The Investment Company Act of 1940 and the Investment Advisers Act of 1940, respectively, regulate companies that invest in securities and the persons that advise them, subject to available exemptions. Since the focus of the law is on investments in securities, not real estate, many private real estate funds and their sponsors historically have been exempt from registration. Hedge funds and their advisers also generally have been exempt from the registration requirements of these laws. The Dodd-Frank Act rescinded the broad exemption generally relied upon by advisers to private funds and enacted three new, narrow exemptions from adviser registration. These recent changes may impact sponsors of private real estate funds.
Whether a real estate fund sponsor will now need to register as an investment adviser generally will depend on the nature of the sponsor’s funds’ investments and ownership structure. Simply stated, if a fund is limited to ownership of fee interests in real estate, whole mortgage loans and majority ownership in entities whose primary asset is real estate, then it is less likely that the sponsor will be required to be registered as an investment adviser. Conversely, if a fund owns minority interests in entities that hold real estate assets and minority interests in loans, it is more likely that the sponsor will be required to be registered. In addition, less onerous regulatory requirements may be imposed if the sponsor advises only private funds and has assets under management in the United States of less than $150,000,000.