How to Start a Real Estate Fund: Entity, Reg D, and Form D

To start a real estate fund, you form a legal entity, qualify the offering for a Regulation D exemption from SEC registration, draft the private placement memorandum and governing agreements, sort out your investment adviser status, and then file Form D with the SEC and notice filings in every state where an investor lives before you accept a dollar. The whole sequence normally takes several months and pulls in securities counsel, an auditor, and a fund administrator. Below is what each step actually involves and where first-time sponsors tend to stumble.

Pick the Legal Entity

Your entity choice sets how profits reach investors, who bears liability, and how the fund is taxed. For private real estate funds the practical choice is between a limited partnership and a limited liability company. Real estate investment trusts exist as a third option but the Internal Revenue Code requires a REIT to have at least 100 beneficial owners and to distribute at least 90 percent of taxable income each year,¹² which rules the structure out for almost any new private fund.

Limited Partnership

A limited partnership has at least one general partner with unlimited personal liability and limited partners whose exposure is capped at what they invested.³ The general partner runs the fund and the limited partners stay passive. That clean split is why LPs remain the default for institutional real estate funds. Because the general partner’s own assets are on the line, sponsors almost always set up the general partner as an LLC or corporation to contain the risk.

Limited Liability Company

An LLC shields every member from personal liability. The operating agreement handles the rest: profit allocation, voting rights, management authority, and exit mechanics. Most fund LLCs are manager-managed rather than member-managed, because investors generally want returns without the operational role. State filing fees to form an LLC run from roughly $35 to $520 depending on where you organize.

Qualify for a Regulation D Exemption

Every sale of a security in the U.S. must either be registered with the SEC or fit an exemption. Full registration is out of reach for most private sponsors, so nearly every private real estate fund raises capital under Regulation D.⁴ The choice inside Regulation D is between Rule 506(b) and Rule 506(c).

Rule 506(b): No Public Advertising

Under 506(b) you can raise unlimited capital from an unlimited number of accredited investors, but you cannot publicly advertise the offering. No social posts, no website banners, no cold email blasts. You may include up to 35 non-accredited but financially sophisticated investors in any 90-day period.⁴ Most managers avoid non-accredited investors entirely, because even one triggers extra disclosure obligations.

Rule 506(c): Public Solicitation Allowed

Rule 506(c) lets you market to the general public. In exchange, every investor must be a verified accredited investor, and you bear the verification burden.⁴ Acceptable methods include reviewing tax returns or W-2s for income, examining bank and brokerage statements for net worth, or getting written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA who has independently verified the investor.⁵ Self-certification alone is not enough.

Who Counts as Accredited

Individuals qualify by meeting either a financial or a professional test. On the financial side: individual income above $200,000 in each of the prior two years (or $300,000 combined with a spouse or partner) with a reasonable expectation of the same this year, or net worth over $1 million excluding the primary residence.⁶ Since 2020, holders of Series 7, Series 65, and Series 82 licenses also qualify. Directors, executive officers, and general partners of the fund itself are accredited by default.

Run Bad Actor Checks Before You Rely on the Exemption

Rule 506(d) blocks an offering from using either 506(b) or 506(c) if the issuer, any director or executive officer, any 20-percent-or-greater equity holder, any promoter, or any compensated solicitor has certain disqualifying items on their record.⁷ Triggers include securities fraud convictions within the past ten years, court injunctions related to securities transactions, and certain SEC cease-and-desist orders. The rule reaches beyond the sponsor to anyone helping sell the offering. Run background checks early.

What a Compliance Failure Costs

If a fund breaks a Regulation D condition, investors may have a right of rescission, meaning the fund has to return their capital plus interest.⁸ That obligation can be crippling once capital is already deployed into properties. The SEC can also pursue civil penalties against the fund and its principals. The two most common failures are advertising violations under 506(b) and inadequate verification under 506(c).

Draft the Offering Documents

Three documents form the legal backbone of the fund. None of them is a weekend template job.

Private Placement Memorandum

The PPM is the disclosure document you hand to prospective investors. It lays out the investment strategy (apartment buildings, industrial, ground-up development, whatever your niche is), target returns, risks, and how the sponsor gets paid. Management fees in private real estate funds typically run between 1 and 2 percent of assets under management, and sponsors normally take a performance-based incentive called carried interest once returns clear a stated threshold. The PPM has to cover property market risks, interest rate exposure, illiquidity, and any conflicts of interest between manager and investors. Anything you disclose in the PPM is much harder for an investor to later claim they were blindsided by.

Operating or Partnership Agreement

This is the fund’s internal rulebook. It governs capital calls, default remedies when an investor misses one, voting rights, and the conditions under which investors can remove the manager. It also sets the distribution waterfall: the order in which cash flows out. A typical waterfall returns contributed capital first, then pays a preferred return in the 6 to 8 percent range, then a catch-up to the sponsor, then splits remaining profits under the carried interest arrangement (commonly 80/20 in favor of investors). Waterfall terms are among the most heavily negotiated points in any fund.

Capital call default remedies matter too. Common tools include forcing a transfer of the defaulting investor’s interest to other partners at a steep discount or forfeiture, withholding future distributions until the shortfall clears, or reducing the defaulting investor’s economic interest to zero over time. A missed capital call during a property acquisition can kill the deal, so these provisions need teeth.

Subscription Agreement

Each investor signs a subscription agreement to commit capital. In it, they represent that they meet the accredited investor standards, acknowledge the risks in the PPM, and commit a specific dollar amount. Once signed, it binds them to the fund’s terms, including future capital calls. For 506(c) offerings, the subscription agreement typically includes a section where the investor provides verification documentation or authorizes the fund to obtain it.

Sort Out Your Adviser Registration Status

Running a real estate fund usually makes you an investment adviser under federal law. Whether you register with the SEC or with your state depends mostly on how much you manage.

A fund managing $100 million or more in regulatory assets generally must register with the SEC by filing Form ADV.⁹ Registration becomes mandatory at $110 million. Below $100 million, you typically register with your state securities regulator instead. Form ADV requires detailed disclosure of your business, personnel, fee structure, and disciplinary history. Once registered, you file an annual updating amendment within 90 days of fiscal year-end and promptly amend the form when material information changes.

There is a useful carve-out. If you advise only private funds and manage less than $150 million in private fund assets, you may qualify as an exempt reporting adviser.¹⁰ Exempt reporting advisers skip full SEC registration but still file a shortened Form ADV and update it annually. For most new sponsors this is the practical path.

Handle the Custody Rule

If you serve as general partner of a fund LP or managing member of a fund LLC, the SEC treats you as having custody of investor assets, because the role gives you legal access to the money. That triggers the custody rule, which requires a qualified custodian (a bank, a registered broker-dealer, or a registered futures commission merchant) to hold all fund assets.¹¹ You cannot hold investor capital in an account under your personal control.

With custody, the fund also needs either a surprise annual examination by an independent public accountant or, more commonly, audited financial statements distributed to all investors within 120 days of fiscal year-end. Most real estate funds pick the audited-statements route because it is operationally simpler. Either way, engage an independent auditor before the fund accepts its first contribution.

File Form D and State Notices, Then Open

Form D With the SEC

Once the first investor is irrevocably committed, you have 15 calendar days to file Form D with the SEC through EDGAR. The clock starts on the commitment date, not the date the wire lands. If you have never filed with the SEC, you first submit a Form ID to get EDGAR access, and that can take a few business days.¹² Handle it well before your first close.

Form D is a notice filing, not a registration statement. It identifies the fund, its executives, the exemption relied on, the total offering amount, and how much has been sold. You must amend it to correct material errors or reflect material changes.¹³

State Notice (Blue Sky) Filings

Rule 506 offerings are federally preempted from state registration, but states can still require notice filings, consent to service of process, and fees.¹⁴ File in every state where an investor lives. Most states accept submissions through the Electronic Filing Depository, which lets you handle multiple states in one batch. Fees range from under $100 to several hundred dollars per state. Missing a state notice does not void the federal exemption, but it can bring state fines and closer scrutiny.

Activating the Fund

With filings in order, the manager opens the escrow account, executes subscription agreements, and issues ownership units. Many funds hold additional closings over the following months to accept new investors, with a Form D amendment following any material change in the amount raised. At that point the fund shifts from formation into operations.

Line Up the Team

Even a small fund needs a handful of professionals.

Fund manager or general partner. Sources deals, runs due diligence, decides when to buy and sell, and reports to investors quarterly.
Securities counsel. Drafts the PPM, operating agreement, and subscription documents; reviews disclosures against federal and state securities law; and handles Form D filings, blue sky submissions, and any adviser registration paperwork. Legal fees for fund formation typically run $25,000 to $75,000 depending on complexity.
Fund administrator. Calculates net asset values, processes capital calls and distributions, and maintains the investor ledger. An independent administrator adds credibility with institutional investors.
Independent auditor. Performs the annual audit under generally accepted auditing standards. Needed for custody rule compliance and expected by sophisticated investors.
Tax adviser. Prepares Form 1065 and each investor’s Schedule K-1, and advises on structuring for different investor types.

Plan for What Comes After Launch

Filing is not the finish line. A fund carries continuous obligations for its whole life.

Real estate funds structured as partnerships or multi-member LLCs are pass-through entities. The fund files Form 1065 and delivers a Schedule K-1 to each investor by March 15 for calendar-year partnerships.¹⁵ Late K-1s carry a $340 per-form penalty, which compounds fast across a full investor list. Extensions are routine, but investors need the K-1 to complete their own returns, so delays create friction. Build your tax timeline backward from March 15.

If you take capital from retirement accounts, pension funds, or endowments, think about unrelated business taxable income. When a tax-exempt investor’s share of fund income comes from debt-financed property, that income can trigger UBTI inside what the investor assumed was a tax-sheltered account.¹⁶ Because real estate funds use leverage constantly, this comes up often. Some funds use blocker corporations or parallel structures to shield tax-exempt investors; at a minimum, disclose the risk in your PPM.

Foreign investors bring FIRPTA into the picture. The Foreign Investment in Real Property Tax Act requires withholding on dispositions of U.S. real property interests, generally 15 percent of the amount realized.¹⁷ When a partnership disposes of U.S. real property, the partnership acts as withholding agent, and failing to withhold creates liability for the fund. Engage international tax counsel before the first foreign closing.

Registered advisers and exempt reporting advisers must update Form ADV within 90 days after fiscal year-end and file interim amendments for material changes. Form D amendments follow the same principle: file when information becomes materially inaccurate.¹³ Audited financial statements and K-1s go out on schedule each year.

Two rulemaking items to track. FinCEN has finalized an anti-money laundering program and suspicious activity reporting rule for registered investment advisers and exempt reporting advisers, with the compliance date delayed to January 1, 2028.¹⁸ Start building AML infrastructure now rather than waiting. Separately, under a March 2025 interim final rule, domestic entities formed in the United States are currently exempt from filing beneficial ownership information reports with FinCEN; only entities formed under foreign law and registered to do business in a U.S. state still carry that obligation.¹⁹ If FinCEN revises that exemption, revisit your compliance posture.

1
Office of the Law Revision Counsel. 26 USC 856 – Definition of Real Estate Investment Trust
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Office of the Law Revision Counsel. 26 USC 857 – Taxation of Real Estate Investment Trusts and Their Beneficiaries
3
Legal Information Institute (LII) / Cornell Law School. Limited Partnership
4
U.S. Securities and Exchange Commission. Exempt Offerings
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U.S. Securities and Exchange Commission. Assessing Accredited Investors Under Regulation D
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U.S. Securities and Exchange Commission. Accredited Investors
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U.S. Securities and Exchange Commission. Disqualification of Felons and Other Bad Actors From Rule 506 Offerings and Related Disclosure Requirements
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U.S. Securities and Exchange Commission. Consequences of Noncompliance
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U.S. Securities and Exchange Commission. Form ADV – Instructions for Part 1A
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eCFR. 17 CFR 275.203(m)-1 – Private Fund Adviser Exemption
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eCFR. 17 CFR 275.206(4)-2 – Custody of Funds or Securities of Clients
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U.S. Securities and Exchange Commission. Filing a Form D Notice
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eCFR. 17 CFR 239.500 – Form D, Notice of Sales of Securities Under Regulation D
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U.S. Securities and Exchange Commission. Frequently Asked Questions and Answers on Form D
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Internal Revenue Service. 2025 Instructions for Form 1065
16
Internal Revenue Service. Unrelated Business Income From Debt-Financed Property Under IRC Section 514
17
Internal Revenue Service. FIRPTA Withholding
18
Federal Register. Delaying the Effective Date of the Anti-Money Laundering/Countering the Financing of Terrorism Program and SAR Filing Requirements
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Financial Crimes Enforcement Network. Frequently Asked Questions