SEC Staff Reports On "Real Estate Funds", But What Exactly Are They?

Yesterday, the SEC staff announced that it had published a suite of new data and analyses of private fund statistics and trends.  These data include information with respect to "real estate funds".  But what exactly is a "real estate fund"?  The answer is more than just a little arcane.

The SEC gathers the data from Form PFs.  You are required to file a Form PF if, among other things, you manage a "private fund".  The Form PF does require disclosures from "real estate funds" and it defines these as "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."  A "private fund" is defined as "Any issuer that would be an investment company as defined in section 3 of the Investment Company Act of 1940 but for section 3(c)(1) or 3(c)(7) of that Act."  Notably missing from the definition of "private fund" is a fund that relies on the exclusion in section 3(c)(5) of the ICA but not either section 3(c)(1) or 3(c)(7).  Section 3(c)(5) excludes a person who is not engaged in the business of issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates, and who is primarily engaged in, among other specified businesses, the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.  The upshot seems to be that the "real estate fund" data included in the staff's report do not include all real estate funds.

The good news for a fund relying on Section 3(c)(5) seems to be that it isn't a "private fund" and because it isn't a "private fund" it can't be a "real estate fund" as defined in Form PF.  However, life may not be all beer and skittles for Section 3(c)(5) funds, but that will be a topic for future posts.