Co-investments in real estate private equity are direct equity stakes that limited partners take alongside a sponsor in a single asset, a portfolio, or a joint venture, outside the main fund. Investors typically hold their interest through a special purpose vehicle with tailored economics, rights, and reporting. Think of it as sitting next to the flagship fund – same deal, customized terms, often with lower or no management fees and a reduced promote.
Co-investments reward speed and alignment when a deal is compelling and time sensitive. In return for writing a targeted check and moving quickly through diligence, investors can reduce fee drag, control specific risks, and improve net returns compared with blind pool exposure.
Who uses co-investments and why the incentives align
Sponsors use co-investments to close large equity checks, manage concentration limits in the core fund, secure bids that require speed and certainty, and build ties with strategic LPs. The impact is practical: faster closes and the ability to pursue bigger, more competitive transactions.
LPs pursue co-investments for lower fees, more precise exposure, and quicker deployment when pipelines are choppy. The payoff is better net IRRs and controlled pacing. The friction point is allocation: how the sponsor divides attractive capacity between the flagship fund and co-investors. Institutional LPs and regulators look for written policies, consistent application, and clear evidence that the main fund is treated at least pro rata.
Structures and use cases that actually get used
Common variants meet different needs and timelines. Single-asset SPVs hold one property. Sidecar pools size capacity for follow-ons. Programmatic JV platforms pair an operating partner with repeat capital. Club deals aggregate a few LPs for scale. Warehousing or bridge vehicles fund fast closings and later roll into a fund. Continuation vehicles are different because they recapitalize existing assets rather than fund entry; while LPs can co-invest into a continuation transaction, that is a secondaries use case rather than new-money entry.
Real estate credit co-investments mirror the equity structure but attach to loan origination or acquisition strategies. Timing is faster and documentation thinner, and risk is collateral-driven rather than business plan-driven.
Legal forms and jurisdictions that keep risk ring-fenced
Legal wrappers aim to isolate liabilities, simplify lender underwriting, and keep recourse limited to committed capital. In the United States, Delaware LLCs or LPs are manager-managed and governed by Delaware law. The SPV holds interests in a property-level entity formed in the asset’s state. Bankruptcy-remote features include separateness covenants, independent managers for debt structures, limited recourse, and non-petition language.
Other hubs follow the same risk ring-fencing logic. Luxembourg SCSp partnerships or Sàrl holdcos are used for EU assets to access treaties and manage withholding. UK LPs or LLPs are common domestically, while Jersey or Guernsey LPs provide tax neutrality and robust administration. Cayman exempted limited partnerships serve non-US pools investing globally. In APAC, Singapore companies or partnerships are common; VCCs sit at fund level, and Australia frequently uses unit trusts or stapled structures for development JVs.
How money moves: capital calls, reserves, and penalties
Capital flows from co-investors and the sponsor fund to the JV or property holdco, paying acquisition equity, closing costs, reserves, and debt fees. Drawdowns occur via capital calls with 5 to 10 business days’ notice. Defaults typically trigger dilution or penalties, so timing discipline and liquidity planning matter.
At closing, lenders will prioritize closing certainty. Completion support for development usually sits with the sponsor or JV parent. Co-investors typically cap exposure at their commitment unless they agree otherwise. In stabilized deals lenders take a mortgage and pledge of equity; for development they may require completion and limited payment guarantees for defined costs.
The two-level waterfall explained with numbers
Returns flow through two tiers. First, the asset-level cash pays operating expenses, taxes, and insurance, then debt service and reserves, then property and asset management fees, and finally distributions to equity. Next, the JV-level equity waterfall pays return of capital, a preferred return, a negotiated catch-up, and then the promote split above hurdles. Co-investors usually sit pari passu with the sponsor fund unless a distinct sleeve is negotiated.
Consider a simple illustration. Assume 100 million dollars of equity, an 8 percent preferred return, a 20 percent promote with a 50/50 catch-up, and 160 million dollars of distributable proceeds in year five. First, 100 million dollars returns capital. Then about 32 million dollars pays the pref (simplified as simple interest for illustration). Next, a 16 million dollar catch-up goes to the sponsor. The final 12 million dollars splits 80/20, so 9.6 million dollars to LPs and 2.4 million dollars to the sponsor. LPs receive 141.6 million dollars in total; the sponsor receives 18.4 million dollars. The effective promote rises with performance because the catch-up and splits compound the sponsor share as outcomes improve.
Governance that protects without blocking execution
Co-investors aim for protections without crossing control lines. Typical negative consents include annual budgets, financings, material leases, capital expenditures above thresholds, general contractor selection and large change orders in development, changes in key managers, settlements above thresholds, related-party deals, and asset sales or refinancings. Some investors negotiate step-in rights or the ability to replace the operating partner for cause. Decision thresholds should be crisp and workable; vague vetoes cause friction at the wrong time.
Transfers generally require sponsor consent, honor rights of first refusal, and meet minimum sizes. Security interests on LP interests are usually restricted and often blocked by lenders. Information packages typically include monthly or quarterly reporting, budget-to-actual variances, covenant compliance updates, annual or event-driven appraisals, and audit timelines. Delivery dates and consequences for misses should be defined to preserve accountability.
Fee stack and promote terms that resist leakage
Co-investments often target fee relief. SPV-level management fees range from zero to 50 basis points, with 5 to 10 percent carried interest and the same preferred return as the JV. Many sponsors offer no fee and no carry at the SPV when the main fund pays full fees, and instead charge property-level asset management fees to cover operating costs. Clear disclosure of property-level fees – acquisition, disposition, property management, leasing, construction management, and asset management – helps benchmark terms and avoid surprises.
Double promotes are the common leak. If the operating partner earns a promote at the JV and the sponsor adds SPV carry, investors should push for elimination, crediting, or caps. Also clarify cost sharing for organizational and abort costs. When a sponsor runs a broad pipeline, caps on abort costs keep alignment tight.
Tax and accounting checkpoints to solve early
Cross-border flows can trigger transfer taxes, withholding, interest deduction limits, and blocker-level taxes that erode returns. Entity classification, debt pushdown, and treaty access are the core drivers of the gap versus investing through the flagship fund. Solve them during term sheet negotiations, not after loan documents are in final form.
Under US GAAP, many co-invest SPVs are variable interest entities. The sponsor is the primary beneficiary only if it has both power and economics. Decision rights and kick-out provisions drive the conclusion and should be reassessed when governance or valuation changes. Under IFRS, IFRS 10 governs control, IFRS 11 governs joint arrangements, and IFRS 12 sets disclosures. Investment entity status can push fair value accounting instead of consolidation. LPs that are investment companies usually carry co-invests at fair value and disclose under ASC 820 or IFRS 13. For real estate credit co-invests, the CECL standard in the US or IFRS 9 may apply.
Regulatory regimes and ERISA limits you must plan for
US advisers need robust allocation and conflicts policies, plus clear disclosures in offering documents and Form ADV. While the Fifth Circuit vacated the SEC’s 2023 private fund rules, fiduciary duty, antifraud principles, and exam scrutiny remain. Co-invest offerings generally rely on Regulation D via 506(b) or 506(c). That means accredited investor checks, bad actor diligence, and controlled solicitation where 506(b) applies. FinCEN has proposed AML and suspicious activity reporting rules for investment advisers. Plan for formal AML obligations. The Corporate Transparency Act now requires beneficial ownership reporting for many SPVs. Pooled investment vehicle exemptions help, but many entities still file, so map them and collect BOI at onboarding.
In the EU and UK, AIFMD and onshored AIFMD govern conflicts, delegation, and disclosure. AIFMD II tightens conflict management and adds rules for loan-originating AIFs, which affects real estate credit co-invests. Marketing co-invest opportunities can be an AIF offer, so rely on national private placement regimes and target professional investors. KYC, AML, sanctions screening, and beneficial ownership registers apply at entity and investor level.
ERISA can be decisive. If benefit plan investors own 25 percent or more of any class and no VCOC or REOC exemption applies, the SPV’s assets can be plan assets. REOC status requires real property management or development under specific tests, and stabilized passive assets often do not qualify. Sponsors often cap benefit plan participation or structure for REOC or VCOC to avoid fiduciary status and prohibited transactions.
Risks that bite and how to preempt them
- Allocation fairness: Document how the fund gets pro rata exposure and why co-invest is needed. Keep that record for exam readiness.
- Timing pressure: Offers move from invite to close in 10 to 20 business days. Pre-clear KYC, tax forms, and committee windows.
- Fee leakage: Eliminate stacked carry and credit deal-level promote against SPV carry.
- Capital call stress: Defaults can trigger dilutive cures. Match capital call capacity to notice periods and negotiate short grace periods.
- Development exposure: Clarify guarantee scope, cap exposure, and tie to independent cost oversight and GMP contracts.
- Lender control: Sweeps, lockboxes, and approval rights can override JV consents. Read cash management and intercreditor terms closely.
- Valuation asymmetry: Require third-party appraisal benchmarks and set frequency up front.
- Enforcement certainty: Specify jurisdiction, venue, and interim remedies and confirm enforceability under local law.
Execution cadence and the owners who make it work
Execution tends to follow a predictable rhythm. In weeks 0 to 1, sponsors circulate a summary, cite allocation policy, and gauge interest. LPs run a fast screen on economics, governance, tax, and timing. In weeks 1 to 2, term sheets and the data room open. Governance, promote, tax blockers, loan terms, and ERISA take center stage. Weeks 2 to 4 see SPV formation, negotiation of JV and SPV agreements, side letters, fee mechanics, and lender consents, along with BOI status and cross-border filings. Weeks 4 to 6 focus on execution, capital calls, KYC and tax form completion, opinions, lender conditions precedent, and onboarding to cash and reporting. Post close, teams work budgets, quarterly reporting, appraisals, covenant updates, and audit planning to support fair value in the first reporting cycle.
Owners across this timeline include sponsor deal and legal leads, co-investor deal teams, counsel on both sides, tax advisors, administrators, lenders, appraisers, technical advisors, and auditors.
A simple readiness scorecard you can use today
Teams move faster when they agree on what “ready” means. A one-page scorecard improves discipline and compresses time to close. Score each line item green, yellow, or red, and do not launch an offer before every row is green or explainable yellow.
- Allocation proof: Written policy cited in the offer, pro rata exposure for the flagship fund, and rationale for capacity sizing.
- Fee alignment: Property-level fee schedule disclosed, double promote eliminated or credited, SPV fee caps agreed.
- Governance clarity: Negative consents listed with thresholds, deadlock and sale mechanics documented, and enforcement venue set.
- Tax path: Blocker or REIT path confirmed, treaty access analyzed, and FIRPTA mechanics embedded in documents.
- Capital calls: Notice periods match LP operational capacity, and default cures and penalties are modeled.
- Lender terms: Intercreditor and cash management reviewed for conflicts with JV approvals and distribution mechanics.
- Compliance map: Reg D track chosen, accredited checks in place, AML and BOI mapped, and AIFMD triggers screened.
- Valuation plan: Appraisal cadence, methodologies, and promote waterfall adjustments defined in the fair value policy.
Comparisons and alternatives that reframe the choice
Separate accounts offer greater control and sourcing breadth but require larger commitments and more infrastructure. Club structures align peers but can slow decisions. Direct acquisitions maximize control and fee savings but demand operating capability. Continuation funds extend holds on existing assets, while co-invests put new money alongside the fund at entry. Preferred equity or mezzanine co-invests trade upside for current pay and downside protection when senior leverage is capped, and they sit differently in the capital stack than common equity.
Practical structuring points to lock in early
- Pre-wire documents: Keep a master side letter, template SPV agreement, and pre-cleared KYC and BOI so the offer-to-close window compresses to weeks.
- Balance rights: Use negative consents for defined matters but avoid day-to-day control that can trigger consolidation or plan asset issues.
- Hardwire exits: Set appraisal cadence, designate valuation agents, add sale triggers at fund end or upon deadlock, and include tag-alongs and sale participation mechanics.
- Build tax guardrails: Bake in tax distribution language, blocker elections, treaty reps, and bilateral indemnities for miscertification.
- Archive defensibly: Index the deal file, capture Q&A and audit logs, set retention schedules, and require vendor deletion certificates at term.
To summarise
Co-investments let sponsors scale and move fast while giving LPs targeted exposure with lower fees. The model works when allocation is fair, documents are simple and enforceable, fee layers are transparent, and tax and compliance paths are solved early. In today’s uneven deal flow and volatile financing markets, that combination of speed, certainty, and alignment is a competitive edge.