The wide variation in reporting practices among real estate opportunity funds demonstrates a need for greater transparency and consistent standards across funds and sponsors, according to an analysis jointly released by the USC Lusk Center for Real Estate and the Zell/Lurie Real Estate Center at the University of Pennsylvania's Wharton School.
The study was co-authored by Stan Ross, chairman of the board of the USC Lusk Center for Real Estate, and Peter Linneman, Ph.D., Albert Sussman Professor of Real Estate, Finance and Public Policy at the University of Pennsylvania.
"Having raised more than $100 billion from investors since the late 1980s, opportunity funds are a permanent part of the real estate investment landscape," Ross said.
"The opportunity fund industry is increasing in size, diversity and complexity, with more funds investing more capital around the globe," he said. "Especially in light of what happened with Enron, there is an urgent need for the industry to adopt standards and guidelines that help investors to determine whether funds are consistently performing as expected."
Performance standards also are needed because "funds are only as good as their sponsors," Linneman said.
"It is much easier for most sponsors to demonstrate an ability to invest than an ability to successfully return capital and profits to investors," he said.
One way to motivate sponsors to perform well is to require that they invest substantial capital in funds.
"That would be a great comfort to investors," Linneman said.
The study noted that opportunity funds have different investment philosophies, time periods, strategies, partners and risks. Fund sponsors and investors will have to address such differences in agreeing on performance benchmarks for funds.
The study suggested a number of guidelines for fund reporting and performance measurement including:
? Quarterly and annual summary of cash inflows and outflows. All activity related to debt or leveraged components of the investment should be fully detailed and updated.
For non-traditional investments, such as distressed properties, details about changes in market conditions, regulatory bodies, restrictions or limitations should be disclosed. Calculations should be done on an individual asset basis as well as on a consolidated basis.
Calculations should be done applying generally accepted accounting principles' rules about consolidating partnerships, joint ventures and non-wholly owned corporations, essentially consolidating where effective control exists.
? Whatever methods are used - and more than one may be appropriate - they should be applied consistently across all funds and sponsors.
The study suggested creating a task force representing the major opportunity funds to develop reporting and performance standards for the industry.
"Based on our preliminary discussions with industry leaders, there appears to be strong support for this idea," Ross said.
Whatever recommendations might be developed, "If funds expect to play a large role in shaping their future, they must take the initiative in meeting investor expectations," Linneman said. "If not, their future could be determined by investors who are pressing for changes in the industry's reporting practices."