Club Deals in Real Estate Private Equity: Structure, Economics, and Governance

Real Estate Club Deals: Structure, Governance, Fees

Club deals in real estate private equity are joint ventures created for a single asset or a defined portfolio. A sponsor runs the asset. Two or more institutional limited partners provide capital and share control. This is not a blind-pool fund and it is not a programmatic joint venture or a co-invest top-up with minimal governance. For investors, the payoff is targeted exposure and real control. For sponsors, the benefit is larger checks, lower-cost equity, and added expertise at the table.

Think of a club as a deal-by-deal partnership with negotiated economics, tight governance, and clear lender-facing commitments. When designed well, a club can lower execution risk, reduce fees relative to funds, and accelerate diligence by leaning on member specialization. When designed poorly, it can bog down decision making and miss market windows.

Why Sponsors and LPs Form Club Deals

Clubs exist because they align capital scale with control. Sponsors form clubs to avoid overconcentrating their balance sheet, to tap lower-cost equity, and to import limited partner operating expertise into design, leasing, or operations. Limited partners join to cut fund fee drag and vintage bunching, to negotiate governance rights, and to focus exposure by sector or region. Lenders often reward clubs that present committed equity, clean approval rights, and workable step-in mechanics with tighter spreads or lighter reserve packages, which improves close certainty. By contrast, diffuse or misaligned clubs pay for complexity in underwriting.

When Club Deals Deliver Best Results

Club deal structures shine when transaction size or execution complexity calls for active oversight. They also help in thin markets where partners can share downside and compress diligence.

Large single assets: Use clubs when the purchase price exceeds any one LP mandate, so you can split risk while preserving control.
Ground-up development: Apply clubs when cost-to-complete, change orders, and completion guarantees need direct governance and frequent approvals.
Recapitalizations and carve-outs: Favor clubs where alignment and governance drive most of the value rather than headline fee savings.

In a slower market, clubs can bridge bid-ask gaps by coordinating underwriting and using LP specialization to reduce diligence timelines. For example, a retail-focused LP can underwrite sales productivity and tenant health faster than a generalist, allowing the club to move quickly to close the capital stack and act on a narrow closing window.

Entity Choices and Cross-Border Considerations

United States: workable defaults and lender comfort

Most US clubs sit in a Delaware limited liability company or limited partnership. Each property sits in a single-purpose entity for lender separateness and bankruptcy-remote covenants. The joint venture agreement sets economics, authority, and reporting. Non-consolidation opinions typically attach at the property SPE level in CMBS-style financing.

Cross-border: routing and blockers

Non-US capital often runs through a Luxembourg SCSp or Sàrl feeder. Foreign and US tax-exempt investors add US C-corporation blockers for tax reasons. Contracts often pick New York law and Delaware entity governance, while property transfers follow the applicable state.

UK and EU: regulatory overlay

Structures commonly use a UK LLP or Luxembourg SCSp with an English law shareholders’ agreement. AIFMD and emerging AIFMD II rules drive manager authorization and reporting, so sponsors should budget time for filings and for delegation and fee disclosures.

Asia: efficient platforms

Singapore vehicles are common. Sponsors often use a VCC for multi-asset platforms and a private company for single-asset clubs, sometimes paired with Luxembourg or US blockers for outbound investment and tax neutrality.

Capital Flows, Waterfalls, and Fees

Capital enters at closing and via capital calls under the joint venture agreement or commitment letters. Each member funds on a several basis, so no member is automatically liable for another’s default. Lenders look for specific performance rights and reliance letters to lock in close certainty.

A typical distribution waterfall runs in this order:

Capital return: Return unreturned capital to all members.
Preferred return: Pay an 8 to 10 percent internal rate of return to all members, usually compounded quarterly.
Catch-up: Distribute to the sponsor until their carry equals the agreed split over the pref.
Residual split: Allocate remaining profits, commonly 80-20 or 70-30 in favor of LPs, with higher carry at higher hurdles.

Fees sit inside or beside the waterfall and should be modeled from the outset. Asset management fees go to the sponsor’s manager and may decline after stabilization. Development and construction management fees are paid at the property level and may be capped by lenders during construction. Acquisition and disposition fees are negotiated and sometimes offset against carry, particularly with larger institutions.

Asset management: 50 to 100 basis points of invested equity or NAV, with step-downs after stabilization.
Acquisition: 50 to 100 basis points, often offset against promote or disallowed with certain LPs.
Development: 2 to 4 percent of hard costs for vertical construction, often lower on very large projects.
Disposition: 50 to 100 basis points, sometimes waived if an outside broker is engaged.
Promote: 10 to 30 percent of profits, often tiered across one to three hurdles as carried interest.

Illustration: If a sponsor invests 10 million dollars and two LPs invest 45 million dollars each, total equity is 100 million dollars. With a 9 percent preferred return and a catch-up until the sponsor holds 20 percent of total profits, then an 80-20 split thereafter, a 1.6x sale in year four produces 60 million dollars of profit. Sponsor carry is about 12 million dollars after catch-up. All fees reduce distributable cash and matter to lenders building the capital stack pro forma.

Governance That Prevents Gridlock

Day-to-day decisions sit with the sponsor as managing member or under a board with LP seats. Major decisions require unanimous or supermajority consent and typically include budgets and changes, financings and refinancings, affiliate contracts, material leases over thresholds, scope changes, out-of-budget capital, transfers, enforcement remedies, and exit plans. Some clubs appoint an independent director to resolve narrow lender issues if there is a deadlock.

Transfers are restricted during the investment period except to affiliates or pre-approved transferees. ROFO or ROFR rights and tag or drag mechanics are common. A lock-up often runs to construction completion or achievement of a stabilization milestone to manage risk. Defaults require explicit tools. If an LP misses a valid call, the joint venture may apply punitive dilution, default interest, suspension of distributions, discounted buy-down, or forced sale. Sponsors sometimes arrange backstops or standby equity to meet lender funding tests.

Fresh angle: tech-enabled governance reduces friction. Clubs increasingly set up a shared decision-rights matrix with auto-deemed consent after short notice periods, embed budget variance triggers in shared dashboards, and run monthly approval slates in a single workspace. That approach preserves speed while maintaining audit trails for lenders and auditors.

Collateral, Guarantees, and Lender Alignment

Property loans are secured by mortgages and equity pledges in the property SPEs. Carve-out guarantees and completion guarantees sit with creditworthy affiliates, typically the sponsor, and sometimes LPs on a several and capped basis. Holdco loans, if used, take pledges of JV interests and sit behind mortgage debt under an intercreditor agreement. Lender consent rights should mirror major decision and transfer rules to avoid surprises at closing.

Core Documents and Sequencing

Documentation drives economics, control, and close certainty. Build a clear record and align sequencing to lender milestones.

JV agreement: Economics, governance, reporting, business plan, budget, major decisions, and transfers.
Commitment letters: Several obligations, specific performance, and lender reliance language.
Contribution and subscription: Initial funding mechanics and investor status representations.
Side letters: MFN, ESG reporting, tax provisions, sanctions representations, and audit timing.
Purchase and sale: Title, environmental, lease representations, indemnities, and survival periods.
Debt package: Mortgage, mezzanine if any, guarantees, completion, cash management, and intercreditor.
Management and development: Fee schedules, KPIs, removal rights, and transition mechanics.
Tax documents: Blocker charters, any REIT elections, tax distribution policy, and FIRPTA certificates.

Sequence matters. Run debt and equity term sheets in parallel, settle the JV agreement before the purchase agreement goes hard, align guarantees before loan approval, and execute commitment letters ahead of lender credit committee. Coordinate calendars for lender and LP investment committees.

Accounting and Reporting Essentials

Under US GAAP ASC 810, the sponsor consolidates only if it has power over significant activities and exposure to significant economics in a variable interest entity. Many clubs fail the power test, so sponsors use the equity method. Investment companies apply ASC 946, measuring at fair value through net income. Under IFRS 10 and 11, shared control with unanimous consent usually means equity method accounting under IAS 28. Required disclosures include related-party fees, fair value hierarchy, commitments to unconsolidated entities, and guarantees.

LP reporting often includes quarterly financials with NAV packages, KPI dashboards, and lender covenant reporting. Many LPs request INREV or NCREIF-aligned metrics with clearer fee and ESG disclosure. Auditors test waterfall math, fee accruals, and development impairment, so keep working papers clean and tie them to system data.

Tax Priorities for Club Investors

In the US, the JV LLC is typically taxed as a partnership. Allocations follow Section 704(b) substantial economic effect, often using targeted capital accounts. Tax distributions commonly run 35 to 45 percent of taxable income and offset future distributions. Section 1061 imposes a three-year holding period for long-term treatment of carry, and development timelines often fall short of that test. Foreign and tax-exempt investors often use REIT or corporate blockers to manage ECI, FIRPTA, and UBTI, and they should monitor evolving domestically controlled REIT rules. In the EU, ATAD 2 hybrid mismatch rules and Pillar Two can influence holding-company and transfer pricing choices.

Regulatory and Compliance Checklist

Club interests are securities offered under private placement exemptions such as Reg D 506(b) or 506(c), and 506(c) requires accredited investor verification. The SEC Marketing Rule governs performance presentation and testimonials, so sponsors should maintain support and show net-of-fee results. The 2023 private fund adviser rules were vacated by a federal court in 2024, but Form PF event reporting adopted in 2023 still applies for material financing events, adviser-led secondaries, and removal for cause. The Corporate Transparency Act requires many SPVs to report beneficial owners. Existing companies must file by January 1, 2025, and 2024 formations generally have 90 days. Sponsors should also screen all investors and counterparties for sanctions and AML, evaluate CFIUS risk for sites near sensitive real estate, and plan for potential HSR filings for larger portfolio or entity-interest acquisitions.

Common Risks and Practical Guardrails

Decision logjam: Keep vetoes tied to value-critical matters and use deemed consent with short notice periods.
Capital call misses: Arrange standby equity, front-load contingency, and match guarantor strength to cost-to-complete.
Waterfall vs. cash traps: Adjust the JV waterfall for lender cash management and tie carry crystallization to clearing debt tests or exit.
Removal and step-in: Define cause precisely and set a termination fee and transition plan for any no-fault removal.
Deadlock mechanics: Use buy-sell tools such as Russian roulette or Texas shoot-out after escalation, excluding steps that need lender consent.
MNPI controls: If a public company invests, tighten information barriers and define material nonpublic information to reduce securities risk.
SPE integrity: Maintain separateness and avoid upstream guarantees that undermine limited recourse.

Alternatives to Club Deals and When to Use Them

Separate account: One LP across multiple assets with strong governance and lower fees than a fund, but higher LP concentration and sponsor capacity drain.
Programmatic JV: Pre-agreed terms for a pipeline, which improves speed and repetition, but needs clear allocation and conflict rules.
Commingled fund: Diversified exposure and scale with less LP control and higher fees, and simpler sponsor operations.
Syndication or co-invest: Fast, light governance, and smaller checks, but limited LP control and cherry-picking concerns by fund managers.
Club deal: Best when deal size is large, risk is bespoke, and LP skill lifts underwriting or execution, with more set-up time.

Execution Timeline and Owner Responsibilities

Pre-term sheet, 1 to 2 weeks: Identify partners and align on governance and the base underwriting case. Prepare models and teasers under NDAs.
Term sheet and diligence, 3 to 6 weeks: Lock high-level economics, major decisions, and fees. Run confirmatory diligence alongside a debt term sheet.
Documentation, 4 to 8 weeks: Draft JV, commitments, management, and loan documents. Form blockers and finalize tax design. Sync lender and LP calendars.
Closing, 1 to 2 weeks: Bring down representations, pre-position wires, sign guarantees, deliver opinions, record mortgages, and fund reserves.
Post-close, 30 to 90 days: Implement reporting, KPIs, and budget governance. Lock GMP contracts and contingencies. Confirm insurance and third-party consents.

Practical Governance Standards That Scale

Meetings: Hold a monthly operating committee meeting with agendas 72 hours in advance and a quarterly board with formal approvals and variance analysis.
Budgets: Adopt an annual budget with variance thresholds, such as 5 percent line-item and 2 percent aggregate, that trigger re-approval.
Reporting: Deliver quarterly financials within 45 days and audited annuals within 90 to 120 days, plus biweekly construction reports during vertical and monthly leasing updates.
Conflicts: Require two independent quotes or LP consent for affiliate contracts. Use fee parity certifications or outside brokers for property management.
Delegations: Grant emergency authority for life-safety and casualty, capped and subject to ratification at the next meeting.
Exit: Predefine internal transfer windows and valuation methods, including discounts for default scenarios to keep liquidity fair.

Closeout Discipline

At exit, archive the JV books and records with an index, versions, Q&A, user lists, and immutable audit logs. Hash the archive, set retention, and instruct vendors to delete data with a destruction certificate once retention ends. Legal holds override deletion, so map them early.

Key Takeaway

Execution discipline beats clever drafting in club deals. Keep governance narrow, economics simple, and cash control tight. Combined with transparent reporting and lender-aligned mechanics, that framework endures stress and pays when it counts for both sponsors and LPs in real estate private equity.