Real estate investors who pushed hard to get improved terms and conditions from their investment managers are not enforcing them, industry insiders say.
What's more, institutional investors now are agreeing to pre-crisis terms and conditions to gain access to “hot” managers and strategies.
Indeed, a recent analysis of real estate and private equity funds closed in 2009 and 2010, as well as funds still being raised, show that there is only spotty adherence to some of the main tenets of the International Limited Partnership Association guidelines that just last year were disseminated and adopted by some of the largest real estate and private equity investors.
“I believe (the real estate limited partner/general partner model is) a flawed model unless and until the limited partners are willing to aggressively assert their rights,” said Theodore M. Leary Jr., president and founder of Crosswater Realty Advisors, a Los Angeles-based real estate consulting and real estate work out firm. Limited partners' lack of governance over their general partners is “the real estate version of the famous Stockholm Syndrome.”
While the financial crisis has put real estate on the ropes as an asset class, there are some types of investments that are still attractive. These days, investors are extremely interested in core real estate funds, said Mike McMenomy, global head of investor services at the Los Angeles office of real estate investment manager CB Richard Ellis.
Mr. McMenomy added that as far as he is aware clients have not asked his firm to add any of the ILPA principles to contracts at all.
And while the queues might be smaller now than a month or so ago, some funds still have lines of investors waiting to get in, he said.
It is these highly sought-after funds that have been able to dictate terms, and investors have accepted “tough fee structures” to get into the funds, said one consultant who declined to be identified.
Investors, however, bristle at the suggestion that they are not negotiating the best deals possible.
“Generalizations are hard to make because each deal is unique,” said Dennis MacKee, communications director for the Florida State Board of Administration, Tallahassee, in an e-mail response to inquiries. “We always negotiate the best terms we can get based on how we value the deal.”
(The board oversees a total of $138.4 billion, including the $112.2 billion Florida Retirement System.)