Contact: Francie Murphy (858/350-5152)
Francie Murphy Associates
francie@fmassociates.com
Richard Frost (215/898-2841)
Zell/Lurie Real Estate Center
frostr@wharton.upenn.edu
Los Angeles/Philadelphia - The wide variation in reporting practices among real estate opportunity funds clearly 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 commented.
The study noted that opportunity funds are characterized as much by their differences as their similarities. Funds have different investment philosophies, time horizons and strategies and, to further complicate matters, they invest for different time periods, have different partners, and take different risks. Fund sponsors and investors will have to address such differences in reaching agreement 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 types of investments (such as investments in 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 fully rolled up consolidated basis.
· All calculations should be done applying GAAP accounting rules with respect to consolidation of partnerships, joint ventures, and non-wholly owned corporations, essentially consolidating where effective control exists.
· Whatever methodologies are used – and more than one may be appropriate – they should be applied consistently across all funds and sponsors.
The study suggested that a task force representing the major opportunity funds be created 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, this much is certain: “If funds expect to play a large role in shaping their future, they must take the initiative in meeting investor expectations,” Linneman commented. “If not, their future could be determined by investors who are pressing for changes in the industry’s reporting practices.”
The study was published in the Spring 2002 edition of the Wharton Real Estate Review. It can be accessed on the USC web site by clicking on the link below or the Wharton web site at http://realestate.wharton.upenn.edu.