Launch real estate funds: Steps and tasks of the fund initiator

Are you interested in the topic of real estate funds, and are you considering launching a fund yourself? We have summarised the most important questions for you from the perspective of the fund initiator:

What is a fund initiator and who can take on this role?

Fund initiator refers to the person (natural or legal entity) who initiates and implements the establishment of a fund. On the one hand, fund founders can be fund initiators with an institutional background such as banks, while on the other hand, they can be private individuals who have economic interest in the planned fund project.

What are the responsibilities of a fund initiator?

A fund initiator takes care of the procurement of the required funds for the respective closed fund. The goal is to finance a planned project. It establishes the fund company, selects the investment property, acquires it within the framework of the fund and takes care of the sale as soon as the end of the term of the fund is reached. He is also responsible for monitoring and managing the fund company.

How can a fund be established?

In addition to expert knowledge, the establishment of a fund also requires a number of prerequisites, which in turn differ depending on the type of fund. While closed funds are not subject to approval, open-ended real estate funds are strictly regulated. In order to be able to set up a separate fund, it is first necessary to establish a company (the fund management company) in addition to the selection of the appropriate investment project. The choice of legal form is usually limited to limited partnerships or limited liability companies. The costs of launching a fund cannot be underestimated and can easily amount to thousands of euros. 

Specifically, the following steps are required to launch a separate fund:

  1. Proof of the necessary funds (“seed money”) for the formation of the fund
  2. Certification of the technical suitability of the fund initiator (e.g. through relevant studies or many years of practical experience)
  3. Presence of a clearance certificate from the tax office
  4. Establishment of a fund management company
  5. Appointment of a managing director
  6. Setting up a securities account so that the funds can be invested securely there
  7. Approval by the competent authority 

How is a fund coordinated and monitored?

In Austria, the Ministry of Finance and the Financial Market Supervisory Authority (FMA) are responsible for monitoring funds; in Germany, the Federal Financial Supervisory Authority (BaFin) is responsible for monitoring funds. Following the 2007/2008 financial crisis, strict rules were introduced throughout Europe to ensure improved investor protection. Accordingly, strict conditions apply to fund companies (reporting provisions, implementation of on-site audits by the FMA/BaFin, audits of the custodian banks, detailed annual financial statements that must be delivered, etc.).

How do open and closed real estate funds differ?

Both are a form of asset management, i.e. the management (and ideally the increase) of assets. While open-ended real estate funds invest in several real estate (projects), closed real estate funds usually focus on one or two projects. The investment of each individual is relatively high and amounts to several thousand euros on average. For open-ended real estate funds, entry is already possible with lower monthly amounts; the exact provisions vary per country. The term of closed funds is several years (10+ years are not uncommon). Unlike open-ended funds, early withdrawal is almost impossible.

  1. Open-ended real estate funds: This variant is most commonly used as an investment because it is lower risk than the closed variant. They are called “open” because the number of properties is not limited and new investors can join the fund at any time and existing investors can leave the fund under certain conditions. Incidentally, the new regulation for open-ended real estate funds provides for a 12-month retention period. The valuation of open-ended real estate funds is carried out by expert opinions from several experts.
  2. Closed-end real estate funds: This is usually about financing a single real estate project. As soon as the desired capital has been reached through investor deposits, the fund will be closed and further deposits or disbursements will no longer be possible.

When will a real estate fund be closed and what happens afterwards?

  • A closed real estate fund is automatically closed as soon as the required investment has been achieved. It is then no longer possible to enter the fund.
  • Also, (temporary) closures can take place for open-ended real estate funds: If there are large fluctuations in the market, there is often the risk that several investors would like to withdraw their investment quickly from the fund. In this case, the fund can be closed temporarily and thus withstand possible sales pressure. In this way, the fund can now overcome liquidity bottlenecks without having to sell under pressure and increase reserves in another way.

Legal advice for fund initiators

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Please note: The above explanations are not exhaustive. They are only for initial information. They do not replace in-depth advice. We would be happy to help you with this.