A separate managed account in real estate is a one-investor mandate where the manager invests under a custom policy and the investor controls key terms, reporting, and consents. A commingled fund pools capital from many limited partners, runs one strategy, and invests under the general partner’s governance and fund documents. Both structures can back core, value-add, opportunistic, or real estate credit.
The choice is simple to state and hard to execute. If you need control, tax design, and pacing that fit your balance sheet, an SMA earns its keep. If you value speed, diversification, and a scarce manager’s pipeline, a commingled fund is often the cleaner answer. The decision turns on deployment capacity, fee math, and how much governance you want to carry each week.
When Each Structure Works Best
Matching structure to strategy starts with your constraints and tempo. Align the capital base you control with the operating reality you face in auctions, development cycles, and credit windows.
- Duration matching: Long-horizon allocators such as insurers and public plans often prefer SMAs for core and core-plus because they can set leverage caps, sector limits, and cash yield targets. Open-end core funds also offer long duration, but without investor-level customization.
- Speed and diversification: Value-add and opportunistic strategies benefit from pooled capital to move quickly and spread exposures across markets and business plans. Commingled funds usually deploy faster and diversify at smaller tickets.
- Bespoke constraints: Investors with unique tax, ESG, or geographic rules that would penalize a pool should use SMAs. If constraints are modest and you value established playbooks, funds are efficient.
- Fee trade-offs: Large SMAs can compress management fees and sometimes carry, while the investor bears more setup and running costs. Smaller checks often reach the same managers more cost effectively through funds.
Fresh angle to consider: budget governance bandwidth. A rule of thumb is two to four senior hours per week for each 100 million dollars of SMA capital during deployment. If you cannot staff that, favor pooled solutions.
Legal Forms and Where They Sit
United States
Commingled funds commonly use a Delaware limited partnership with a Delaware GP LLC. Parallel funds and alternative investment vehicles handle ERISA, non U.S., and tax exempt investors. REIT or blocker feeders are common to manage effectively connected income and unrelated business taxable income. Open end core funds are also Delaware LPs with subscription and redemption mechanics.
SMAs range from an investment management agreement with asset level SPVs to a fund of one Delaware LP or LLC. Asset entities are often Delaware single member LLCs with title holders in the property state. With ERISA capital, managers rely on REITs or REOCs to avoid plan asset status.
Europe and UK
Luxembourg dominates cross border commingled structures. RAIFs using SCS or SCSp partnerships operate under AIFMD compliance. SIFs and Part II funds also appear. UK assets are frequently held via JPUTs for tax transparency. Irish ICAVs are rising in real estate credit. AIFMD dictates depositary, valuation, and reporting.
EU managers use discretionary portfolio management under MiFID with client SPVs or funds of one, often Luxembourg RAIFs with a single investor. In the UK, SMAs invest through JPUTs, UK companies, or limited partnerships. Ring fencing is achieved with separate SPVs and non recourse asset debt.
Ring Fencing, Governing Law, and Liability
Equity vehicles isolate liabilities with entity separateness and non recourse financing. SMAs ring fence at the mandate level by using dedicated SPVs, while funds ring fence at the fund level. Bankruptcy remote features are uncommon for equity and more common in credit and securitization where true sale matters in loan aggregation.
Governing law choices follow execution and precedent. Delaware law typically governs U.S. LPAs and LLCAs due to flexibility and case law, while asset entities use the property state’s law for real estate issues. Luxembourg law governs EU cross border funds. English law often governs JPUT trusts and many cross border finance and JV agreements.
How the Money Moves
Capital Commitments and Deployment
In commingled funds, LPs make commitments and the GP issues pro rata capital calls. Subscription lines bridge timing and improve deal certainty. Allocation policies govern deal splits across vehicles to reduce conflicts. In SMAs, the investor funds a fund of one or wires per IMA instructions. Capital calls follow a negotiated budget and pace. Subscription lines depend on investor credit and mandate terms. For mechanics and risks, see this overview of subscription credit facilities.
Waterfalls and Priority of Payments
Closed end funds often use a whole of fund distribution waterfall with an 8 percent preferred return, a 100 percent GP catch up to a set split, then 80 or 20 or similar. Deal by deal waterfalls accelerate carry but require strong clawbacks with escrow or guarantees. SMAs allow the investor to choose deal by deal or portfolio waterfalls, set hurdles, and define carry. Some mandates remove carry and adopt base plus performance fees tied to income or benchmarks. Expense priority is negotiated and may exclude items the investor pays directly. For context on sequencing and math, review this primer on distribution waterfalls.
Collateral, Security, and Lender Controls
If the vehicle borrows, lenders take pledges of equity and cash accounts and require non recourse carve outs. In SMAs, lenders may underwrite to the investor’s covenant and ask for consent rights over withdrawals or mandate changes. Fund subscription lines rely on uncalled capital and LP support.
Control, Transfers, and Information Rights
SMAs can grant the investor consents over acquisitions, leverage, budgets, key hires, and dispositions above thresholds. Transfers are negotiated and often free within the investor’s group, subject to KYC. Reporting is continuous and granular. Investors can specify auditors and valuation advisors. Commingled funds use LPACs to handle conflicts, key person, valuation policy changes, and financings beyond limits. Transfers need GP consent and must clear securities and AIV constraints. Reporting follows fund standards and regulation.
To preserve deal speed, many SMA investors use two lane consent rules. Routine or small transactions clear under pre set filters, while larger deals trigger formal approvals. This design keeps win rates competitive without sacrificing oversight.
What to Expect in the Paper Trail
Commingled funds deliver a private placement memorandum, an LPA, subscription documents, the investment management agreement, carry vehicle terms, admin, custody, and valuation policies, related credit facilities, and side letters with most favored nation processes. SMAs typically include the IMA or fund of one LPA, asset level JV and property management agreements, custody and banking agreements, tax structuring documents, and compliance schedules for allocation, valuation, conflicts, and key person tailored to the account.
Economics and the Fee Stack
Fee Load and Who Pays
Commingled fund management fees often run 1.0 to 1.5 percent on commitments during the investment period, then on invested cost or NAV. Carry is frequently 20 percent over 8 percent with GP catch up. Fund expenses include organization, admin, audit, tax, legal, valuations, and broken deal costs if permitted. SMAs are negotiated, often 0.35 to 0.85 percent on invested capital or NAV with scale breakpoints. Carry ranges from zero to 15 percent depending on leverage, risk, and hurdle. Investors may bear more third party costs directly to keep headline fees low. Fee holidays during deployment are common.
Negotiating Levers and Practical Benchmarks
Investors pay higher fees in funds for speed, diversification, and access. SMAs compress fees when large tickets displace pooled capacity and reduce distribution costs. Borrowings may be included or excluded from the fee base in either case, so spell it out. As an internal yardstick, budget a 50 to 150 basis point net return swing between fund and SMA depending on deployment pace, turnover, and how much you shift expenses to the asset level.
Illustrative Comparison
Assume a 500 million dollar SMA invests 90 percent over three years, charges 0.60 percent on invested capital, and 12.5 percent carry over 6 percent with a 50 percent catch up. A comparable fund charges 1.25 percent on commitment during a three year investment period and 20 percent carry over 8 percent with a 100 percent catch up. If both produce a 12 percent levered property level IRR pre fees, the SMA’s lower fee base can add 60 to 120 basis points to net IRR depending on expenses and deployment timing. A fund can narrow the gap by deploying faster and lowering risk through broader diversification.
Accounting, Reporting, and Valuation
Both vehicles deliver capital account statements, IRR and multiple on invested capital, and fair value estimates. Many real estate funds meet investment company criteria under U.S. GAAP, and LPs often use the NAV practical expedient. SMA investors may need to consolidate SPVs under IFRS 10 or ASC 810 if they control relevant activities or absorb primary variability. Managers avoid consolidation by demonstrating decision making authority without majority economics. Commingled LPs rarely consolidate. Disclosures include fair value policies, input levels, and valuation committee governance. Audits cover the vehicle. SMAs may extend to asset SPVs on request.
Tax, Regulation, and Compliance
United States
Non U.S. investors face FIRPTA on U.S. property dispositions. REIT blockers can provide cleaner exits and manage effectively connected income. Tax exempt investors face unrelated business taxable income from debt financed property, which REITs and blockers can mitigate. SMAs allow bespoke blocker design and treaty planning, and the investor funds the setup and compliance. Transfer pricing applies to affiliated services and financing. State and local taxes vary by asset location.
Advisers to SMAs and funds may need SEC registration depending on assets under management and client type. Form PF has expanded event reporting for large private fund advisers. The Fifth Circuit vacated the SEC’s 2023 private fund adviser rulemaking, but fiduciary and marketing obligations remain. Corporate Transparency Act beneficial ownership reporting began in 2024. Many U.S. SPVs must file unless exempt.
United Kingdom and European Union
Non residents are taxed on gains from UK property and property rich entities. JPUTs can provide transparency and help with stamp duty planning, subject to anti avoidance rules. Interest limitation and hybrid mismatch rules affect leverage. Luxembourg SCSp partnerships are transparent and RAIFs are lightly regulated and generally tax neutral. Withholding on operating income depends on the asset jurisdiction and treaty access at the blocker level. AIFMD II clarifies loan origination regimes, relevant for real estate credit mandates. SFDR can reach discretionary mandates, and many allocators expect SMA reporting aligned to Article 8 or 9 standards if their policies require it.
Governance Pressure Points
Managers running multiple vehicles must follow written allocation policies. SMA vetoes can slow execution and create perceptions of preferential treatment. LPACs in funds monitor conflicts while leaving the manager discretion within policy. Open end funds offer periodic subscriptions and redemptions, but practical liquidity depends on markets, flows, and queues. SMA investors can set exit pacing and disposition plans, although illiquidity still sits at the asset level. Real estate valuation requires judgment. Independent appraisers, rotation schedules, and valuation committees help. SMA investors often ask for model access and property data to validate NAV, while funds standardize processes.
Watch expense discipline. SMAs can see expense creep if the investor absorbs asset and bespoke reporting costs. Funds risk cross subsidization without precise allocation rules and MFN enforcement. Spell out what is fund borne, asset borne, or manager borne, and use caps and pre approvals. Tie key person to mandate leaders, not just firm heads. Capacity constraints can steer pipeline toward higher fee vehicles, so negotiate capacity sharing and minimum SMA deployment rates. If ERISA and benefit plan investors exceed 25 percent of any equity class, assets can be plan assets. Real estate vehicles use REOCs, VCOC treatment, or blockers to avoid that status.
Execution Playbook and Timeline
Weeks 0 to 4 set the foundation. Define the mandate, target returns, leverage caps, tax goals, and governance. Test deployability and fee economics. Draft a term sheet. Have tax advisers outline the structure. Weeks 5 to 12 are about documentation and infrastructure. Draft the IMA or LPA, side letters, and SPV templates. Build valuation, allocation, and conflicts policies. Appoint depositary or admin in the EU and auditor or admin in the U.S. Open bank and custody accounts and prepare BOI filings for U.S. entities.
In parallel during weeks 8 to 16, confirm adviser registration, update Form ADV, file AIFMD notices where relevant, and prepare SFDR disclosures for applicable EU mandates. Obtain tax rulings or opinions for treaty access and blocker design. Complete FIRPTA and state tax analyses for targets. During weeks 10 to 18, negotiate subscription facilities and asset level debt terms, stand up the reporting stack and KPI dashboards, define audit scope, and finalize JV and property management precedents. By weeks 16 to 24, execute governing documents and admin agreements, fund the initial call, and launch the pipeline with pre cleared consent mechanics. Establish the LPAC for funds or the governance cadence for SMAs. In steady state, run quarterly valuations and reports, annual audits, ongoing compliance testing, strategy reviews, and annual SMA guideline and fee breakpoint checks.
Kill Tests, Pitfalls, and Smart Alternatives
- Deployability test: Can the manager invest the ticket within constraints at the required pace without adverse selection? If not, avoid an SMA.
- Cost of structure: Do tax and regulatory mechanics add 50 to 100 basis points of drag versus the pooled alternative? If yes, favor a fund.
- Concentration check: Does the strategy invite concentration risk that a single account cannot absorb? If yes, use a fund or a club.
- Consent timing: Do consent timelines fit auction dynamics? If not, relax consents or avoid SMAs.
- Liquidity need: Do you need quarterly liquidity without queue risk? If yes, consider listed or semi liquid vehicles.
Recurring pitfalls include over customization that slows execution, expense allocation gaps, allocation ambiguity, valuation governance misses, ERISA leakage, weak tax substance, and inconsistent data security. Many of these are solvable with thresholds, filters, pre agreed allocations, independent appraisal policies, preemption rules, board formalities for holding companies, and tight vendor privacy terms.
Alternatives include club deals and programmatic JVs for multi investor negotiated control at the deal or platform level, and co-investments for lower fee exposure to specific assets alongside a fund with limited governance and fast decision windows. Public or non traded REITs may offer liquidity or retail capital. Separate credit accounts provide tight control over loan type, geography, and risk and can be benchmarked against real estate direct lending frameworks.
Market Context and Practical Rules of Thumb
Institutional demand supports both structures. Large pensions and insurers continue to use SMAs for control and fee savings, while value add and opportunistic fundraising cycles around manager selection and deal windows. Open end core funds manage redemption queues with liquidity tools, which can imply a queue risk premium to your cash flow planning. The regulatory load stepped up with BOI reporting, Form PF changes, and AIFMD II. Both models bear these costs, although SMAs feel more of the per mandate overhead.
Three practical rules help decisions. First, if the GP’s proprietary pipeline is the scarce asset, pay for access in a fund. Second, if your constraints or tax design would force the GP to build separate deal paths anyway, consolidate that work inside an SMA. Third, if win rate depends on rapid approvals, build a two lane consent model with dollar thresholds and pre cleared filters.
Decision Framework
Choose an SMA when control, customization, and tax design matter most, the ticket is large, and the manager has a scalable pipeline. Set deployment targets, consent mechanics that match deal speed, and fee breakpoints that reward scale. Choose a commingled fund when diversification, speed, and access to a scarce GP matter most and your policy constraints are not unique. Scrutinize the allocation policy, liquidity tools, and expense rules. Negotiate MFN to neutralize side letter disparities. For terminology on how fund and deal decisions interact, see this guide to fund vs deal-by-deal trade-offs.
Closing Thoughts
Both structures can produce attractive after fee results. The wrong choice shows up as opportunity loss from slow SMA governance or as fee and liquidity drag in broad pools. Decide with the kill tests, pressure the economics, and only then paper the structure. On close out, archive all governing documents and reports with a full index and immutable audit trail, apply a clear retention schedule, and obtain vendor deletion confirmations. If you want to frame where equity sits relative to debt in these decisions, revisit your capital stack and, where relevant, complement funds with club deals or targeted real estate private equity strategies to balance speed and control.