Regulatory requirements and compliance frameworks for real estate fund managers
Compliance functions within real estate funds address regulatory requirements that span investment adviser registration, property-level regulations, and investor protection rules. Real estate fund managers face the standard compliance obligations of registered investment advisers while also navigating real estate-specific regulations that affect property ownership and operations. Building an effective compliance program requires understanding both dimensions of this regulatory landscape.
Most real estate fund managers register with the SEC as investment advisers under the Investment Advisers Act of 1940. Registration triggers ongoing compliance obligations including Form ADV filings, books and records requirements, and custody rule compliance. Some smaller managers may qualify for state registration or exemptions, though institutional LP expectations often push managers toward SEC registration regardless of technical requirements.
The private fund adviser rules have expanded compliance requirements for real estate fund managers. Quarterly statement requirements mandate specific disclosures about fund performance, fees, and expenses. Audit requirements ensure independent verification of fund financials. The compliance function must ensure these obligations are met consistently across all funds under management.
Property ownership subjects real estate funds to regulations that other alternative asset managers rarely encounter. Environmental compliance affects acquisition due diligence, ongoing operations, and disposition planning. The compliance function typically oversees environmental assessment processes during acquisitions and monitors ongoing compliance with environmental permits and regulations.
Zoning and land use regulations constrain property operations and development activities. While day-to-day zoning compliance often falls to property managers, the compliance function should ensure appropriate oversight exists for properties pursuing entitlement changes or operating under conditional use permits.
Fair housing and anti-discrimination laws apply to residential properties and certain commercial uses. Property managers typically handle operational compliance, but fund-level policies should ensure consistent adherence across the portfolio. Training programs and periodic audits help maintain compliance with these requirements.
Funds utilizing REIT structures face ongoing compliance requirements to maintain tax-advantaged status. REITs must meet asset tests, income tests, and distribution requirements annually. The compliance function monitors these requirements throughout the year, not just at year-end, to avoid inadvertent violations that could jeopardize REIT qualification.
Asset tests require that at least 75% of a REIT's assets consist of real estate assets, cash, and government securities. Income tests mandate that at least 75% of gross income come from real estate-related sources and 95% from real estate sources plus dividends, interest, and gains from securities sales. Distribution requirements generally mandate distributing at least 90% of taxable income annually.
Real estate transactions carry inherent AML risks that compliance programs must address. While investment advisers are not currently subject to the Bank Secrecy Act, many real estate fund managers implement voluntary AML programs as a matter of best practice. These programs typically include investor due diligence procedures, suspicious activity monitoring, and OFAC screening.
Some transactions may involve parties subject to their own AML obligations, such as banks providing acquisition financing. The compliance function coordinates with these parties to ensure required documentation is provided without unnecessarily delaying transactions.
Third-party property managers handle many compliance functions at the property level. The fund compliance function should establish oversight mechanisms to ensure property managers maintain appropriate compliance programs. This may include reviewing property manager compliance policies, requiring periodic certifications, and conducting site visits or audits.
Management agreements should clearly delineate compliance responsibilities between the fund and property manager. Provisions addressing regulatory inspections, compliance reporting, and indemnification for compliance failures help establish appropriate expectations.
Institutional LPs conduct detailed compliance due diligence during the fundraising process and throughout the fund term. The compliance function supports these reviews by maintaining organized documentation, responding to due diligence questionnaires, and coordinating operational due diligence visits. Demonstrating a mature compliance program can differentiate managers in competitive fundraising environments.