INVESTMENT STRUCTURES FOR REAL ESTATE INVESTMENT FUNDS ppt

Investment
Structures for
Real Estate
Investment
Funds
kpmg.com
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
Investment Structures for Real Estate Investment Funds
Who Are the Investors?
In What Assets Will the Fund Invest?
Will There Be Leverage?
What Types of Investment Vehicles Are Available?
What May Be the Appropriate Type of Entity for Each
Type of Investor and Asset?
Structuring to Accommodate Preferences of Different Types of Investors
Bios
Conclusion
Contents
01
02
03
04
05
06
11
13
12
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG
name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS

Investment Structures for
Real Estate Investment Funds1
Investment Structures for
Real Estate Investment Funds
While the real estate market has yet to experience a real
recovery, fund investment in real estate appears to be
experiencing a cautious but marked rejuvenation, and fund
managers are beginning to raise capital to form funds.
But given the experience of the economic downturn,
investors who venture into real estate investments nowadays
do so with greater demands to accommodate their particular
needs so as to maximize their potential return while
minimizing their downside risk. One of these crucial demands
is for investment structures that accommodate specific tax
sensitivities, given that tax consequences can negatively
impact an investor’s return, as well as the volatility of returns
in today’s real estate markets. Consequently, in structuring
real estate investment funds, it is critical to understand each
prospective investor’s tax sensitivities.
This summary and the chart below provide a general overview
of some of the major factors that should be considered in
structuring real estate funds that invest primarily in U.S. real
property. The chart identifies the type of investment entity
through which each type of investor may generally prefer to
invest. As the chart illustrates, the mix of different types of
investors, each with distinct tax considerations, can lead to
divergent and often conflicting structuring preferences.
This summary explains the investor preferences indicated
in the chart and provides an overview of how alternative
investment vehicles (AIVs) may be used to accommodate

different types of investors within a real estate fund.
Investment in U.S. Real Estate
Structuring Summary Chart
Investor Classification
Rental Real Estate – Fractions
Rule Compliant (all passive, no
services, incidental personal
property or personal property
leased with the real property)
Rental Real Estate –
Not Fractions Rule
Compliant
Operating
Real Estate
Business
(e.g., Hotels)
Dealer
Property
Only
Taxable
o o o o
Super Tax-Exempt
o o o o
Tax-Exempt (qualified organizations)
o * ◊ * ◊ (w/TRS) *
Tax-Exempt (all others)
* ◊ * ◊ * ◊ (w/TRS) *
Foreign
* ◊ * ◊ * ◊ (w/TRS) *
Foreign Governments (assuming blockers

are not controlled commercial entities)
* ◊ * ◊ * ◊ (w/TRS) *
Legend:
* Blocker
o Flow-through
◊ REIT (assuming domestically controlled)
w/TRS With Taxable REIT Subsidiary
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
Investment Structures for
Real Estate Investment Funds 2
Who Are the Investors?
The typical investors in U.S. real estate funds include individuals
and entities, both domestic and foreign. Foreign investors may
include foreign governments and their sovereign wealth funds.
Tax-exempt entities, including pension funds, educational
institutions, and other large charitable organizations, also may
invest in U.S. real estate funds.
Each of the various investor types is subject to distinct taxation
regimes, as generally discussed below.
• Taxable investors include high net-worth individuals,
corporations and flow-through entities that have high
net-worth individuals, and corporations as owners.
• Tax-exempt organizations may include state-sponsored
pension funds that often are treated for tax purposes as
a division of a state and are generally thought to be tax-
exempt based on their governmental status (i.e., “super
tax-exempts”). Other tax-exempt investors include corporate
pension funds, educational institutions, and charitable
organizations that generally are taxable on their income from

unrelated businesses and on income from debt-financed
investment (known as unrelated business taxable income, or
UBTI), subject to certain exceptions.
• Foreign governments and their integral parts and controlled
entities generally are not taxable on certain types of income,
including U.S. investments in stocks or bonds or other
securities, certain financial instruments, and interest on
deposits in banks in the United States. Funds identified
as sovereign wealth funds may be considered a foreign
government, integral part thereof, or an eligible controlled
entity; however, not all sovereign wealth funds are eligible
for tax-exempt treatment. Foreign governments are taxable
on income derived from commercial activities or received
from controlled commercial entities (as generally explained
below). Also, the exemption for foreign governments does
not apply to certain investments in U.S. real property that
are covered by the Foreign Investor Real Property Tax Act
(FIRPTA). Notably, income or gain from real property that the
foreign government holds directly or through a flow-through
entity is not exempt from U.S. taxation.
• Finally, foreign investors may include individuals and
foreign entities that are taxable on a net basis on income
that is effectively connected to a U.S. trade or business.
These foreign taxpayers are subject to the FIRPTA regime,
which generally taxes foreign persons on the disposition
of U.S. real property as though they were engaged in a
U.S. trade or business.
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
Investment Structures for

Real Estate Investment Funds3
In What Assets Will the Fund Invest?
The consequences to each of the types of fund investors (see
chart on page one) vary significantly depending on the type of
real estate asset in which the fund invests. For example, dealer
property (i.e., property held primarily for sale to customers in
the course of business, such as condominiums or residential
lots) will present income character issues for virtually all
tax-exempt and foreign investors. Likewise, the operation
of commercial properties (e.g., hotels) almost always will
require structuring to facilitate investment by tax-exempt and
foreign investors. Considerations will be more varied for office,
industrial, and residential rental properties. Foreign investors
will likely still require structure modifications, while tax-exempt
investors may, in some cases, be able to hold the property
directly through the fund.
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
Investment Structures for
Real Estate Investment Funds 4
In addition to the type of asset in which a fund invests,
the type of financing used by the fund affects the tax
treatment of certain investors. When property is financed
with leverage, income from the property generally is taxable
to tax-exempt entities (other than governmental divisions)
as income from unrelated debt-financed property unless
certain exceptions apply. Certain tax-exempt investors
that are “qualified organizations,” including pension funds,
educational institutions, title holding companies, and certain
church retirement income accounts, may avoid being taxable

on debt-financed income from real property when the fund
complies with strict income allocation requirements, referred
to as “the fractions rule,” and when the financing otherwise
meets certain requirements.
Will There Be Leverage?
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
Investment Structures for
Real Estate Investment Funds5
What Types of Investment Vehicles
Are Available?
Just as the type of investor, type of real estate asset, and type
of financing critically impact the tax treatment of investors,
the type of entity through which investors invest in funds
also affects the tax consequences. The fund itself generally
is formed either as a partnership or a limited liability company
taxable as a partnership for U.S. federal income tax purposes.
Thus, the fund itself is not taxable, and the fund’s income, loss,
deduction, and credit flow through to its partners. Also, any
trade or business conducted, directly or indirectly, by the fund
will be attributed, for many purposes, to its investors.
On the other hand, when an investor invests through a
corporate entity, referred to as a “blocker,” the trade or
business of the underlying flow-through entity generally is
not attributed to a partner. Thus, holding such an interest
would not cause a foreign investor to be treated as engaged
in a U.S. trade or business. Also, dividend income from a
corporate blocker would be passive income that generally
would not be treated as UBTI for tax-exempt investors.
Finally, an “uncontrolled” blocker similarly protects a foreign

government from being connected to a commercial activity and
from being taxable on the income from the entity. The trade-off
for this “blocker” protection is that these corporate entities
are subject to an entity-level tax. In addition, if the blocker is a
domestic entity, dividends and interest payments made to a
foreign investor generally are subject to withholding at a rate of
30 percent (unless reduced by applicable treaty or exempted by
statutory exemption). If the blocker is a foreign entity operating
through a branch in the United States, it may also be subject
to a 30 percent (unless reduced by applicable treaty) branch
profits tax on the branch’s effectively connected earnings
and profits to the extent that income is treated as repatriated
under the branch profits tax rules.
Another type of entity often used to “block” certain types of
income is a real estate investment trust (REIT). Although REITs
are taxable as corporations for most federal income tax purposes,
they are permitted deductions for dividends paid and thus,
effectively, are not taxable at the entity level so long as taxable
income is distributed on an annual basis. REITs are subject to a
separate taxation regime. Formed as corporations for U.S. federal
income tax purposes, REITs block the attribution of a trade or
business and generate dividend income that generally is not
treated as UBTI for tax-exempt investors. However, REITs are
subject to restrictions on the types of property they may hold
and the activities in which they may engage. REITs are largely
restricted to holding rental real estate assets and mortgages as
well as a limited amount of other passive investment assets.
REITs are discouraged from holding dealer property through
the imposition of a 100 percent penalty tax imposed on any
gains derived from the sale of such property. However, REITs

may form taxable REIT subsidiaries (TRSs) subject to certain
rules, which may engage in many activities that a REIT could not
undertake directly. Thus, the chart indicates the potential use of a
REIT for investments in rental real property and for investments in
hotel property if used together with a taxable REIT subsidiary.
With the foregoing as background, this section of the summary
will discuss each of the types of investors included in the
structuring summary chart above, with reference to the various
types of real estate investments included in the chart. It is
important to note that the types of entities indicated in the
chart with respect to each investor and type of investment are
merely general recommendations. However, when structuring
funds, the individual facts and circumstances for each investor
and investment must be separately considered in each case to
ensure that all potential consequences have been considered.
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
Investment Structures for
Real Estate Investment Funds 6
What May Be the Appropriate Type of
Entity for Each Type of Investor and Asset?
Domestic Taxable Investors
Taxable investors who are U.S. citizens may include individuals
and entities that are either taxable as corporations or are
themselves flow-through entities with taxable partners.
Domestic individuals and entities taxed as corporations may
invest directly in a fund or through partnerships formed to
invest in other funds. These investors typically do not want
to incur an entity-level tax on their investments. As a result,
they generally do not want to invest in a fund through a taxable

corporation and they do not want the fund to invest in real
estate through a taxable corporation.
State-Sponsored Pension Funds and
Other “Super Tax-Exempt” Investors
Certain U.S. pension funds that are considered to be an
integral part of a state or political subdivision are thought not
to be taxable for U.S. federal income tax purposes on any of
their income. Thus, as shown in the chart, such investors are
not particularly sensitive to the type of real estate asset to be
invested in, the structure through which the investment is
made (other than through a taxable corporation), or the use
of leverage. Accordingly, similar to taxable investors, these
investors may prefer to invest through flow-through entities
so as not to incur an entity-level tax. Due to some uncertainty,
however, as to the nature of the tax exemption applicable
to these investors, some may prefer structuring alternatives
more generally applicable to other types of tax-exempt
entities in order to provide an additional level of safety in
their tax structuring.
Tax-Exempt Investors
Tax-exempt investors (other than the state-sponsored investors
discussed above) are taxable on income from unrelated
businesses and on income from debt-financed property.
However, tax-exempts generally are not taxable on rents from
real property, unless such property is financed with leverage.
If tax-exempt investors are to be allocated income from a fund
that would be subject to tax as UBTI, the tax-exempt investors
would be required to file U.S. tax returns in addition to paying
the required tax. Many tax-exempt investors that would be
subject to U.S. tax on allocable fund income prefer to invest

through corporations (i.e., blockers) that are required to pay the
tax and file U.S. tax returns. Although such a structure may not
result in any tax savings for the tax-exempt entity, the structure
will allow the tax-exempt entity to avoid paying tax directly or
filing tax returns.
As mentioned above, certain tax-exempt investors that are
“qualified organizations,” such as educational institutions
and pension funds, may avoid UBTI from debt-financed real
property when a fund complies with the fractions rule and
the financing meets certain requirements. In broad terms,
the fractions rule prescribes onerous requirements with
respect to partnership allocations that are intended to prevent
the shifting of tax benefits from tax-exempt partners to taxable
partnerships. Where financing meets certain requirements,
the fund is able to comply with the fractions rule, holds only
real property generating rental income, and does not otherwise
engage in another trade or business, qualified organizations
will prefer to invest directly in the fund and enjoy flow-through
treatment. It is important to note, however, that, depending
on the services offered to tenants of the rental property or
the level of personal property associated with the real estate,
such income nevertheless may be taxable as UBTI, even to a
qualified organization.
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
Investment Structures for
Real Estate Investment Funds7
Because it is rare that a fund would invest in real estate
without leverage, we assume for purposes of the chart and
the summary that all fund investments are debt-financed.

Thus, where the fund does not comply with the fractions
rule, qualified organizations may prefer to invest through a
blocker. Because tax-exempt entities that are not “qualified
organizations” are not protected from UBTI associated with
debt-financed property by compliance with the fractions rule,
such entities also may prefer to invest through a blocker.
When the fund engages in operational activities with respect
to real estate that go beyond rental activities, as in the case of
a fund that holds and manages hotel properties, tax-exempts,
including qualified organizations, will often prefer to invest
through a blocker to avoid recognizing UBTI. Similarly, when
a fund invests in dealer properties such as condominiums,
tax-exempt investors will often prefer to invest through a
blocker to avoid UBTI.
Assuming a tax-exempt entity did not incur debt to acquire
its shares, dividends from a corporation (including a REIT)
are generally not taxable as UBTI to a tax-exempt entity.
When pension funds are direct or indirect investors in a REIT,
it is important to be aware of rules relating to “pension-held
REITs.” A REIT is a pension-held REIT if (1) it would not have
qualified as a REIT but for being allowed to meet the REIT
minimum shareholder requirement by looking through to
the beneficial ownership of its qualified trust owners, and
(2) at least one qualified trust holds more than 25 percent
(by value) of the interests in the REIT, or one or more qualified
trusts (each of which own more than 10 percent by value of
the REIT interests) hold in aggregate, more than 50 percent
(by value) of the REIT interests. When a pension fund holds
more than 10 percent (by value) of a pension-held REIT,
a portion of the pension fund’s dividends from the REIT

may be treated as income from an unrelated business and
taxable as UBTI to the extent such amounts would be UBTI
if recognized directly by the pension fund (and provided the
UBTI amounts exceed five percent of the REIT’s total income).
Finally, it is important to understand that, although investing
through a corporate blocker may provide certain advantages
to a tax-exempt entity, as more particularly discussed above,
investing through a blocker may, in some circumstances,
increase a tax-exempt’s overall tax rate. First, to the extent
that some property in the blocker generates “good” income
that otherwise would be exempt from tax (i.e., rents from real
property), that income would be subject to an entity-level tax
inside the blocker. Second, even though property generates
operating income that is UBTI, in many situations, gain from the
sale of that property may not generate UBTI. Third, operating
income and disposition gain from leveraged property,
whether held directly or through a partnership, may be
taxable by reference to a fraction that is the relevant debt
over the relevant adjusted basis. If held in a blocker, the entire
amount of income and gains is subject to an entity-level tax.
Tax-exempt investors may mitigate some portion of the
corporate-level tax imposed on non-REIT blockers through
the use of leverage (and deductible interest on such leverage),
although the protection provided by the blocker will be
compromised if the blocker is a “controlled entity.”
Foreign Investors
Foreign investors typically do not want to trigger a U.S.
income tax return filing obligation. Property operations often
will rise to the level of a trade or business, such that the
income attributable to such operations would constitute

taxable, effectively connected income to a foreign investor.
Similarly, the FIRPTA rules generally would cause gains from
the disposition of U.S. real estate to be subject to U.S. tax
with respect to such investors and may require the filing of a
U.S. income tax return. For this purpose, real estate includes
direct interests in U.S. real property as well as stock in certain
domestic corporations that hold primarily U.S. real property
that are United States Real Property Holding Corporations
(USRPHCs).
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
Investment Structures for
Real Estate Investment Funds 8
REIT blockers are often a foreign investor’s first choice
because they effectively do not pay tax if they make the
required distributions each year. However, REIT blockers
can be used only if the fund invests in activities that permit
the blocker to be a REIT. Dispositions of REIT shares are not
taxable to foreign investors under the FIRPTA rules if the REIT
is “domestically controlled.” A REIT is domestically controlled
if, during the shorter of the five-year period ending on the date
of the disposition or the period it was in existence, less than
50 percent in value of the stock was held directly or indirectly
by foreign persons. Ordinary dividends from a domestically
controlled REIT are treated as any other dividends received
by a foreign person, subject to withholding at a fixed rate
of 30 percent, as reduced by treaty, if applicable. However,
when a domestically controlled REIT disposes of real property
and distributes a capital gain dividend, the portion of the
dividend designated as a capital gains dividend will be treated

under the FIRPTA rules as income from the disposition of U.S.
real property, subject to FIRPTA withholding and possibly the
branch profits tax (where the investor is a foreign corporation),
and necessitating the filing of a U.S. federal income tax return.
When the use of a REIT blocker is not possible—for example,
when the types of properties to be held by the real estate fund
include dealer property—foreign investors typically prefer to
invest through a corporate blocker entity. As with investment
through a REIT blocker, a foreign investor avoids attribution
of the property-related trade or business activity by investing
through a corporate blocker, and the ownership of blocker
stock, in itself, does not trigger a U.S. income tax return filing
obligation. When the corporate blocker is formed as a domestic
entity, it will be required to file a U.S. income tax return, and
dividends and interest paid by the blocker to the foreign
investor generally will be subject to withholding at a flat rate
of 30 percent as payments of fixed or determinable annual
or periodic income. The withholding tax on dividends may be
reduced or eliminated by treaty, if applicable. If the domestic
corporation is a USRPHC, the withholding rules become more
complicated and treaty benefits may be limited to a 10 percent
gross tax. In addition, a blocker’s effective tax rate may be
reduced, subject to certain limitations, by the use of leverage
to provide deductions for the blocker, thereby reducing its
taxable income. Furthermore, when foreign investors fund
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
Investment Structures for
Real Estate Investment Funds9
capital as debt to the blocker, interest payments to the investor

may, in certain circumstances, qualify as portfolio interest,
which is statutorily exempt from the 30 percent withholding
tax. Alternatively, interest payments paid by the blocker debtor
to a foreign investor may qualify for a reduced withholding
rate under an applicable treaty. It is important to note that
a domestic, non-REIT blocker may constitute a USRPHC,
depending on its percentage of “U.S. Real Property Interests”
(USRPIs) relative to other property. If the blocker is a USRPHC,
then the transfer of its shares is generally taxable under
FIRPTA, and the transferee of the shares would be required
to withhold 10 percent of the gross proceeds from the sale.
Thus, a typical exit strategy involves the sale of assets beneath
the blocker, with the blocker making a liquidating distribution
of its share of the sales proceeds to its shareholders. After the
taxable sale of all real property held (directly or indirectly) by
the blocker (assuming all its dispositions of USRPIs in the past
five years were taxable), the blocker would no longer be a
USRPHC. As a result, FIRPTA would not apply to the liquidation
of the blocker.
If, instead, a foreign blocker is used, the blocker would be
subject to FIRPTA on the disposition of its USRPIs, which
would include its interest in the real estate fund. The blocker
would be treated as engaged in a U.S. trade or business and
therefore required to file a U.S. tax return. Further, the foreign
blocker could be subject to the 30 percent branch profits
tax. In addition, a branch interest tax may apply to interest
payments made by the foreign blocker. As with the 30 percent
withholding tax on dividends and interest, the branch profits
tax and the branch interest tax may be reduced by treaty,
if applicable.

Foreign Governments, Integral
Parts of Foreign Government, and
Controlled Entities
Generally, a foreign government is not subject to tax in the
United States on certain U.S. source investment income,
including income from stocks, bonds, or other domestic
securities owned by such foreign governments. In addition,
a foreign government is not taxable on the sale of stock
of a USRPHC, unless the foreign government controls
the USRPHC. For purposes of this exemption, a foreign
government includes its integral parts and controlled entities.
Regulations provide that foreign pension funds that meet
certain requirements are controlled entities for purposes of
the exemption.
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
Investment Structures for
Real Estate Investment Funds10
The exemption, however, does not apply to income derived
from the conduct of any commercial activity (whether within or
outside the United States), income received from a controlled
commercial entity, or income derived from the disposition of
any interest in a controlled commercial entity. A controlled
commercial entity is an entity that engages in commercial
activities either within or outside of the United States, in which
a foreign government holds (directly or indirectly) 50 percent
or more of the interests (by vote or value) or holds (directly or
indirectly) an interest that provides the foreign government
effective control of the entity. Importantly, a foreign
government is not exempt on income earned from a USRPI

or income from the disposition of a USRPI.
Historically, in order to preserve its exemption from U.S.
taxation, a foreign government investor would, in all
circumstances, prefer to invest through a blocker entity that
is subject to U.S. tax. Recently issued regulations, which
eliminate attribution of commercial activities to minority
limited partners with limited management rights, mitigate the
need for blocking commercial activities in many instances.
Nonetheless, foreign government investors still generally
will use blockers for the same reasons as more traditional
non-U.S. investors. The foreign government investor will
receive dividends attributable to such blocker entities that are
exempt from U.S. tax. In preserving the exemption available to
foreign governments, it is critical that the blocker not constitute
a controlled commercial entity, so other investors should
own more than 50 percent, by vote and value, of the direct or
indirect interests in such entity. Accordingly, the chart assumes
that any blocker entity is not a controlled commercial entity.
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
Investment Structures for
Real Estate Investment Funds11
Structuring to Accommodate Preferences
of Different Types of Investors
As illustrated in the chart on page one, and the above
discussion, different types of real estate fund investors
often have varying, and sometimes conflicting, structuring
preferences (e.g., certain investors may require a blocker while
others prefer not to use a blocker) relating to their particular
tax sensitivities. In order to meet the needs of all the types

of investors in any given real estate fund, it often becomes
necessary to introduce fund structures that use alternative
investment vehicles, or AIVs. In the simplest structure, all
investors who desire blocker protection could invest through a
single blocker. However, as explained above and as illustrated
in the chart, not all investors will desire to block all investments.
Consequently, a fund manager may be asked to create
separate partnerships that meet the needs of specific types of
investors where investors desire that only certain investments
be blocked.
Further, it may be preferable that some investments are
blocked using corporate blockers, while others are blocked
using REIT blockers. In addition, the investors may have
different preferences regarding whether the blocker is inserted
in the structure above or beneath the fund.
Although this discussion focuses on the tax sensitivities
and preferences of the investors, it is important to note
that the sponsor is also affected by the structuring choices
dictated by the varying needs of the investors, as blockers
can affect the sponsor’s income due to entity-level taxes.
In addition, the use of AIVs in certain structures may
complicate economic arrangements relating to the sponsor’s
carried interest.
Finally, as the complexity of a structure increases to
accommodate the needs of different investors as well as
the sponsor, special attention should be paid to the overall
economic substance of the investment plan. This includes
examination of the governing terms of the various entities
employed, as well as the terms of any special agreements
that may be required between entities and/or the investors.

© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
Investment Structures for
Real Estate Investment Funds12
Conclusion
As the discussion above makes clear, when structuring funds
that will invest in U.S. real property, it is critical to consider
the type of investments the fund will make and the likely
investors in the fund, and to understand the sensitivities of
those investors. With careful analysis and planning, different
investors with varying needs can be accommodated within an
AIV structure that takes those needs into consideration.
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
Investment Structures for
Real Estate Investment Funds13
Bios
James Sowell is a principal in the Passthroughs group of the Washington National Tax
Practice of KPMG LLP, focusing primarily on tax issues relating to partnerships and
REITs and debt workouts for such entities. He currently leads the Real Estate practice
for Washington National Tax. Mr. Sowell previously was with the U.S. Department of the
Treasury (Office of Tax Policy) where he served first as an attorney advisor and then as
an associate tax legislative counsel. Mr. Sowell is a former chairman of the Real Estate
Committee of the American Bar Association (Tax Section) and is a former vice chairman of
the Tax Policy Advisory Committee of the Real Estate Roundtable.
James Sowell
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
Investment Structures for
Real Estate Investment Funds14

Jim G. Tod is a partner in the Passthroughs group for KPMG’s Washington National Tax
Practice. The Passthroughs group is responsible for providing advice to KPMG professionals
and clients regarding the federal taxation of partnerships, real estate investment trusts and
S Corporations across all major industries. In addition, the Passthroughs group advises on
specialty areas such as like-kind exchanges, oil and gas, leasing, and excise taxes. Mr. Tod
has over 19 years of experience focusing on alternative investment funds and the use of
partnerships and limited liability companies in merger and acquisition transactions. He also
has extensive experience in real estate, debt restructurings, and alternative energy and has
served as a member of the AICPA’s Partnership Technical Resource Panel and a project
leader for the American Bar Association.
Jim G. Tod
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
Investment Structures for
Real Estate Investment Funds15
Ossie Borosh is a senior manager in the Passthroughs group of the Washington National Tax
Practice of KPMG LLP. Ms. Borosh has more than 10 years of experience in providing tax
services to clients with an emphasis in the partnership taxation area and has experience in a
broad range of partnership and real estate transactions and debt restructurings. Ms. Borosh
is the chairman of the ABA Tax Section Real Estate Committee’s Subcommittee on
Tax-Exempt Investor issues.
Ossie Borosh
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
Investment Structures for
Real Estate Investment Funds16
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS
For more information on this topic,
please contact:

Jim Sowell

202.533.5710
kpmg.com
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY
A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY
TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information
to specific situations should be determined through consultation with your tax adviser.
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG
name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. 26701NSS