Understanding Commingled Funds in Real Estate

​"Commingling" in real estate refers to mixing funds from different accounts into one. In commercial real estate (CRE), a sponsor collects money from institutional investors for a single deal, like buying or managing a property. Commingling also happens when a sponsor gathers cash for a real estate fund to buy several properties, simplifying the work of handling separate accounts for each investor.

The legality of commingling funds depends on various factors. The practice is legal if investors are aware of it and consent to sponsors combining their funds for specific projects. Openness in fund management, shown through good recordkeeping and transparency around fund allocation, makes it legal. Commingling turns illegal if investors don't know about it or if the investment money gets mixed with personal funds or caters to a sponsor's own expenses. A real estate lawyer can determine whether commingling fits the rules in a given case. 

Commingled funds go toward property or project investments such as commercial or industrial development. These funds come in different forms to suit different investment goals and strategies. Equity funds buy stocks to grow capital, spreading cash across many stocks for gains as values rise. Index funds follow a market index, while sector funds target areas like real estate. Fixed-income funds invest in bonds for a steady income. Real estate funds let investors tap into commercial properties without direct ownership. The fund's sponsor or skilled investment experts handle management needs, such as selecting investments, dividing assets, talking to investors, and financial reporting.       

Commingled funds stand out for their accessibility to multiple investors, often with lower entry costs than other options. Since expenses are shared among all investors, the overall costs, including fees and trading expenses, are lower. As such, investors can keep more of their earnings while paying less in fees.

Additionally, these funds open doors to private debt options, like direct real estate loans or mezzanine financing. In private debt endeavors, commingling funds softens the blow if one sector falters by spreading investments across borrowers, sectors, or geographic regions. However, proper management and disclosure are vital to ensure compliance with regulations and protect investors' interests. Conducting strong checks on borrowers and regular monitoring are essential to maintain fund performance and limit losses from defaults.

Commingled funds offer clear gains for investment strategies. For instance, some managers use these funds to open private real estate to smaller investors. These investors can now create diverse portfolios once limited to large institutions through the funds. Others use the commingled structure to pool resources from multiple investors, targeting multifamily investments in growing regions. 

Real estate professionals should recognize that commingling funds, while potentially beneficial, carries some risks. Mixing all funds into one without careful tracking can lead to issues such as misallocated spending or cash shortages. Moreover, unlike stocks or mutual funds with public tickers that investors can look up and track anytime, commingled funds aren't listed in the stock market, making it harder for investors to track earnings from capital gains, rental income, or interest. Finally, with lighter reporting rules than public investments, tracking the fund's performance takes more work and offers less clarity.

Maria Stamolis

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