Fund vs Deal-by-Deal: Trade-offs in Real Estate Private Equity

Fund vs Deal-by-Deal: Structures, Fees, and Execution

A fund is a blind-pool, closed-end vehicle that raises commitments first and buys assets later under a mandate. A deal-by-deal structure raises equity for one asset or a small pool, and investors opt in or out each time. Separate accounts sit between them: a dedicated program with investor approval rights per deal.

Choosing the right vehicle changes who decides, how fast you can close, and when economics show up. This guide compares fund and deal-by-deal mechanics side by side, focuses on practical execution, and highlights where hybrids like SMAs and programmatic JVs fit when markets are slow and financing is tighter.

Context and incentives: who wants what and why it matters

Every structure allocates power and economics differently, so incentives drive friction. GPs want discretion, speed, and stable fees to build a durable team and process. LPs want control, fee efficiency, and alignment that holds in a rough patch. Lenders want ring-fenced collateral, clean governance, and predictable enforcement paths. Therefore, the choice of vehicle is ultimately a decision about who decides, who pays, and when.

Market backdrop: why pacing and certainty beat price in 2025

Rates remain elevated, and time costs money. The target federal funds rate stood at 5.25-5.50% as of mid-December 2024. Core open-end returns were negative in 2023 and roughly flat through Q3 2024. LPs are concentrating re-ups, while first-time managers are turning to SMAs and single-asset syndications to build traction. In this environment, execution certainty and funding cadence often outrank marginal price gains.

Legal forms and governing law: build for bankability

Most funds use a Delaware limited partnership with a Delaware LLC GP. Offshore feeders in Cayman or Luxembourg serve non-U.S. and tax-exempt investors, typically pooling into a master entity, which then owns jurisdiction-specific holding companies. European managers often use Luxembourg RAIFs or Irish ILPs to comply with AIFMD. Ring-fencing relies on limited recourse at the fund and single-purpose entity structures at the asset level.

Deal-by-deal vehicles usually hold each asset in a stand-alone SPV, commonly a Delaware LLC or LP in the U.S. Cross-border stacks might use Luxembourg SCSp and Sàrl entities, Cayman ELPs, JPUTs, or UK LPs. Bankruptcy remoteness sits at the asset SPV via independent managers, separateness covenants, and non-petition language.

Delaware and New York law dominate sponsor control and finance documentation in the U.S. For EU investors, Luxembourg law aligns with RAIF and SCSp standards and adds depositary oversight. Choice of law must fit lender expectations too, since U.S. banks typically require Delaware or New York for equity and intercreditor agreements.

Key mechanics: how funds actually operate

Capital formation: LPs commit a fixed amount. First close starts the clock, and rolling closes use equalization interest. Commitments are hard for the term, which improves close certainty and platform durability.
Drawdowns: Capital calls usually run on 10-15 business days’ notice. Subscription lines bridge calls, while NAV lines can finance follow-ons or distributions later. Optics on IRR can improve, but leverage cost increases.
Investment selection: The GP invests within the mandate, with LP consent often limited to key person or defined thresholds. That speeds underwriting but reduces LP control.
Waterfall: European-style sequences pay back capital and preferred return, then GP catch-up, then carry on aggregate results. This defers carry and enhances alignment across deals.
Fees: Management fees sit on commitments during the investment period, then step down to invested cost or NAV. Transaction and other fees are offset by 50-100% as negotiated.

Key mechanics: how deal-by-deal actually operates

Capital formation: The sponsor markets a specific asset. Investors sign SPV subscriptions and fund at signing or closing, with no future obligation beyond the deal.
Drawdowns and escrow: Wires flow to escrow for the purchase price and initial capex. SPV subscription lines are rare and require tight investor documentation.
Investment selection: Investors underwrite the full package pre-close. After closing, major decisions need investor consent under the JV agreement, which increases control but can slow decisions as groups grow.
Waterfall: Promote crystallizes at the asset. Cash sweeps pay debt, reserves, operating expenses, preferred return, then promote, with no cross-deal netting.
Fees: Recurring fees are lower and skew to transaction charges. Asset management fees sit at the SPV or property manager, with promote paid on sale or recap.

Economics and fee stack: what you pay and when

Funds: recurring fees trade for platform capacity

Management fees: Commonly 1.0-1.75% on commitments during the investment period, then on invested cost or NAV. This gives GP budget certainty but can create early cost drag.
Carry terms: Often 15-20% over an 8-9% pref with 100% catch-up to the agreed split. European waterfalls pay only after returning capital and pref across the fund.
Offsets: Transaction and monitoring fees typically offset 50-100% of management fees. Side letters can change outcomes for specific LPs.
Leverage costs: Subscription lines price off short-term rates. NAV lines carry higher spreads. Optics can improve reported IRR but increase interest expense.

Deal-by-deal: lower drag but more promote volatility

Asset management fee: Often 50-100 bps of invested equity, or a fixed property-level fee for defined services and scope.
Promote: Frequently 20-30% over an 8-10% pref, with tiers tied to IRR and equity multiple. There is strong upside on winners and no portfolio netting.
Transaction fees: Acquisition and disposition fees of 50-100 bps, plus development fees as applicable. Offsets are often negotiated.
Equity arrangement fees: Sometimes charged for syndication or structuring. Sophisticated LPs push for offsets.

Worked example: promote with and without netting

Consider three equal-size deals. Deal A uses $50 million of equity and exits at $75 million in year 3, with a residual $15 million after return of capital and preferred return. A 20% promote yields $3 million to the GP. Deal B breaks even and pays no promote. Deal C exits at $40 million on $50 million of equity, resulting in a $10 million loss. In a fund with a European waterfall, the loss from Deal C reduces aggregate profits, and carry may be deferred until the fund clears the pref across all deals. In deal-by-deal, the GP keeps the $3 million promote on Deal A with no automatic netting, which creates relationship risk unless clawbacks are negotiated.

Accounting and reporting: align audit, lender, and LP optics

Funds under U.S. GAAP typically qualify as investment companies under ASC 946 and carry investments at fair value through earnings. Managers assess consolidation under ASC 810. Many funds are variable interest entities, but external managers generally do not consolidate if economics and power remain with investors and fees are market-standard. First-time managers face more scrutiny on judgments around control and fair value policies.

Deal SPVs holding a single asset are often VIEs. Sponsors may consolidate if they control key decisions and have meaningful economics unless they qualify as investment companies. Investors account at fair value if they are investment companies or use the equity method with significant influence. Annual audits remain standard, with valuation anchored to the ASC 820 hierarchy. Lender appraisals should reconcile with audit marks to avoid dueling values.

Tax notes: blockers, FIRPTA, and carried interest

U.S. tax-exempt and non-U.S. investors usually seek to avoid effectively connected income and unrelated business taxable income. Funds and SPVs deploy REIT or corporate blockers with treaty claims to manage FIRPTA and ECI. The trade-off is blocker maintenance cost and distribution constraints for REITs. FIRPTA withholding applies on U.S. real property dispositions, so plan certificates and buyer reporting early to preserve closing certainty.

GP economics often target long-term capital gains for carried interest under IRC 1061’s three-year rule. Shorter holds and recapitalizations can recharacterize carry. Management fees are ordinary income, and fee waivers demand careful documentation.

Cross-border structures must navigate EU anti-hybrid rules, potential VAT on management, and transfer pricing to support substance in Luxembourg or other hubs. State and local taxes, including transfer taxes and UBT, are asset-specific and can be material.

Regulatory checkpoints: do not let process sink your closing

U.S. advisers with over $100 million AUM generally register with the SEC and follow custody, compliance, and Marketing Rule requirements. The 2023 private fund adviser rules were vacated in 2024, yet exams still focus on fees, expenses, valuation, and conflicts. Offerings often rely on Reg D 506(b) or 506(c), noting that 506(c) requires accredited investor verification. SPVs formed in 2024 or later may need beneficial ownership reports to FinCEN unless exempt; calendar those filings.

In the EU and UK, marketing to professionals triggers AIFMD or AIFMD-like rules. AIFMD II will refine delegation, loan-origination, and reporting by 2026. SFDR can touch EU feeders or aggregators, while single-asset SPVs not marketed typically avoid it.

Risk considerations: common pitfalls by structure

Funds: capital, pacing, conflicts, and controls

Capital availability: Commitments support certainty, but subscription lines require eligible investors and precise side letters. While investor defaults are rare, they strain liquidity.
J-curve and pacing: Early fee drag can impair DPI optics, and slow deployment in a high-rate regime pressures IRR.
Conflicts: Cross-fund allocations, recycling, and warehousing need advisory committee oversight. GP-led secondaries require fairness opinions and transparency.
Cash control: Custody rules require qualified custodians. Subscription line borrowing bases hinge on investor notices and documentation.

Deal-by-deal: funding, governance, optics, and debt terms

Funding certainty: Soft-circled orders can slip pre-close. Backstops or warehouse lines help, and broken-deal costs should be allocated upfront.
Governance sprawl: Each SPV adds investor rights, reporting, and consents. Timelines expand as investor counts rise.
Promote optics: Deal-level promote crystallizes without netting. Early wins can look rich if later losses hit elsewhere.
Debt interlocks: Lenders require SPE covenants, completion guarantees, and cash dominion. JV consent rights must align with lender control in downside cases.

Alternatives and when to use them

SMAs: One LP with negotiated fees and approval rights. It is efficient for large allocators wanting control and for sponsors needing anchor capital without a commingled fund.
Programmatic JVs: A tight group pre-agrees capital and a business plan for multiple assets. It is faster than fundraising and slower than a single-asset SPV.
Club funds: A small group, blind or semi-blind, often as a step toward a broader fundraise.
Continuation vehicles: Move mature assets into a new SPV backed by secondary capital when market exits are suboptimal.

Timelines and kill tests: speed, readiness, and go or no-go

Typical timelines

Funds: Strategy to term sheet in 2-4 weeks; drafting in 6-10 weeks for LPA, PPM, subscriptions, and side letters; first close in 3-6 months; investment period runs 3-5 years.
Deals: Equity memo and model in 1-2 weeks; docs and closing in 2-6 weeks for JV, debt commitments, KYC, and escrow; post-close reporting monthly during lease-up or construction, then quarterly.

Practical kill tests

Fund anchors: If you cannot secure 25-30% of target from anchors within six months, start with SMAs or deals.
Pipeline: If heavy warehousing is needed, confirm transfer pricing and financing availability with a clean audit trail.
Facilities: Confirm subscription and NAV facilities are viable with your investor base and side letters.
Track record: Ensure attribution is clean and key person coverage is tight before launch.
Deal backstops: For single assets, have callable backstops or a warehouse line if investors short-fund.
Tax readiness: Set blocker plans and elections by investor cohort before signing.

Practical governance: templates that prevent disputes

Funds: committee cadence and systems

Advisory committee: Keep a calendar, a conflict log, and ASC 820 valuation memos. Run MFN with electronic tracking.
Waterfall engine: Build and test your waterfall model well before the first carry event to reduce audit and distribution errors.

Deals: standardize JV controls

JV template: Define reserved matters, response deadlines, deemed consent mechanics, and an emergency budget override for lender-mandated actions.
KYC/AML: Centralize investor due diligence for reuse across multiple SPVs.

Debt integration: smooth calls and protect alignment

Funds: coordinated facilities

Subscription lines: These smooth capital calls but raise interest cost and create IRR optics questions. Confirm borrowing base eligibility and side-letter consents.
NAV financing: These add late-life flexibility and require negative pledges and more consents. Use conservatively to avoid cross-collateral complexity.

Deals: asset-level leverage

Senior and mezzanine: Expect bespoke intercreditors, completion guarantees for development, and bonded GMPs where applicable.
Investor support: Capital call support letters can improve loan terms but are sensitive and need exact drafting.

Information, records, and hygiene: set standards day one

Marketing rules: Comply with the SEC Marketing Rule by showing net and gross performance with equal prominence, clear methods, and base and downside cases in deal decks.
Beneficial ownership: Build FinCEN beneficial ownership reporting into every U.S. entity formation checklist and calendar updates.
Audit readiness: Maintain formal valuation policies, use third-party appraisals for material assets, and document challenge in committee minutes. Align lender appraisals with audit marks.
ESG data: If EU investors are involved, expect energy, emissions, water, and tenant metrics. Lenders increasingly ask for the same.
Records: Archive with indexing, versions, Q&A, user logs, and full audit trails. Hash archives, set retention schedules, obtain vendor deletion certificates, and honor legal holds.

Decision framework: a two-minute structure picker

Repeat co-investors: If you have recurring demand for a narrow strategy and need speed, deal-by-deal wins. It shortens time-to-cash and lets investors price idiosyncratic risk one asset at a time.
Operational intensity: If you run an operationally intensive value-add program and need freedom to pivot across subsectors and holds, a fund with a European-style distribution waterfall aligns risk sharing and supports portfolio construction.
Control-seeking LP: If an LP wants pacing and veto rights with efficient execution, SMAs or programmatic JVs balance control with visibility and keep cross-border disclosure manageable.
Platform scale: If the platform needs fee revenue to scale, a fund is the durable answer. If first-close is far away, an anchor-backed club or SMA can bridge to a commingled fund at first close.

One extra lens helps in real life: score your pipeline on certainty, speed, and concentration. If 70% of near-term deals sit with one operating partner or one submarket, prioritize ring-fencing and preserve lender alignment. If diversification and multi-year capacity matter most, favor a fund and set fees that fund the hiring plan without burning early DPI optics.

Closing Thoughts

Funds trade investor control for deployment certainty, diversification, and platform economics. Deal-by-deal trades speed and investor underwriting control for governance sprawl and funding risk. In a high-rate, low-liquidity market, many sponsors will lean on SMAs, programmatic JVs, and selective single-asset syndications to build a record, then scale into funds when capital loosens. Whatever you choose, write governance clearly, align waterfalls with true risk, and pre-wire debt, tax, and reporting so the closing table is about price and certainty, not paperwork.

Related reading: NAV facilities and subscription lines can change both your liquidity and reported IRR. For deeper dives, see NAV Financing: A Deep Dive, Subscription Credit Facilities, and mechanics of a Distribution Waterfall.

For context on fee design and fund revenue, this overview of fund fee income is a useful companion. Strategy choice also links to your value-add playbook and how you stack risk and priority in the capital stack.