How to Attract Institutional Capital Through the Development of Operating Guidelines

Fall 2018 Issue
By: John Mackel, MAI, ASA, CCIM, Moss Adams LLP

Incorporating best practices for policies, strategies and procedures can make smaller developer-operators appealing to institutional investors.

EMERGING INVESTMENT managers, such as smaller developer-operators building institutional capital sources – also known as “sharpshooters” – have been on a years-long surge in the U.S. growth economy. To help ensure continued success in attracting investment capital, now is the time for these firms to solidify their operating and reporting systems within a set of operating guidelines. (See “How to Attract Institutional Capital,” Development, summer 2017.)

An article published by Prequin in January 2018 reported that real estate firms raised $109 billion in 2017. Even though this represents a decrease from 2016 fundraising levels, it still made 2017 the fifth consecutive year in which fundraising topped $100 billion.

If they do not take the time to draft and implement high-quality reporting and operating guidelines, many sharpshooters that have built institutional relationships during this economic upswing will likely be adversely affected when a downturn hits or new executives take over at their institutional investors. Companies with solid systems already in place will fare significantly better.

Companies that are using or planning to use institutional capital can benefit from reviewing their internal systems for best practices and planning for “what-if” property or market changes and downturns. For many firms, this involves implementing clear operating guidelines.

Operating Guidelines

Operating guidelines aren’t only for a CEO or CFO’s benefit during strategy meetings and client reporting. They also serve a firm’s marketing team, which understands that using these guidelines can be a selling point for gaining new capital sources.

john macket headshot

John Mackel

Institutional investors also generally want their partners to use institutional-grade operating and reporting systems. While some investors will overlook weaknesses in this area if an investment manager has a long track record of superior performance, evaluating systems and instituting best practices can improve an already good relationship. It can also help investment managers avoid future problems.

Accordingly, the majority of successful real estate investment firms employ a consistent behind-the-scenes tool: operating guidelines. These are a set of working documents comprising a firm’s policies, practices and procedures, and incorporating operational and investment strategies.

Operating guidelines serve as a basic building block of success for any real estate operating firm, especially for an early-stage firm aiming to become a major investor-partner or a registered investment adviser. While some companies succeed without them, those companies are taking a risk, because potential partners and investment sources rely heavily on operating guidelines to assess a firm and move forward with capital decisions.

For companies already using operating guidelines, it may be time to revise and update these documents because of reporting changes as well as other institutional investment, finance and accounting changes.

What to Include

Once a company chooses which reporting standards and approaches it wants to use, it’s important to codify them in its operating guidelines. These can include the following:

1) A statement of objectives or an overview of process points and timing that specifies how each process is handled, providing checks and balances as well as a system that can be referred to in the event of staff changes, office integrations or other disruptions.

2) Quarterly or mid-year forecasting.

3) Asset management reporting practices.

4) Valuation processes for properties and investments, especially if a company is operating under net asset value reporting.

5) Development of a valuation committee with assigned roles and responsibilities.

6) Disposition or acquisition processes, including steps for solicited and unsolicited transactions.

Timing is essential when assessing what steps need to be taken to meet financial reporting deadlines. Listed below are some steps that may be overlooked or under-emphasized. A firm needs to carefully map out this process, which must include the following:

  • External information gathering.
  • Vendor setup and work flow.
  • Internal review and feedback.

This process could include internal and external reporting that involves specific actions, such as model conversions, valuations, appraisals, asset repositioning and disposition planning.

Accounting and Reporting Trends

Transparency, consistency and accuracy are essential when creating, revisiting or updating a company’s operating guidelines. As companies strive to create stronger operating and reporting guidelines, certain trends emerge. More investment companies are adopting fair value reporting, as investment partners and their investors are pressed to report values that are more transparent. Many companies are increasing the frequency of their internal and/or external valuation from an annual basis to a quarterly one. Most larger companies are also alternating the external appraisal firm they use for annual valuations every three years.


The following examples illustrate various ways sharpshooters have used operating guidelines.

A Residential Real Estate Development Firm With Private Equity Partners. This real estate firm specializes in master-planned community and land development, including for-rent and for-sale single-family housing as well as multifamily projects and condo conversions.

Although the firm had successfully launched two funds already, it wanted to create a more diversified fund with the potential to attract pension-fund partners for the first time. Its effort to create operating guidelines focused on supporting institutional fundraising and establishing timelines driven by financial reporting deadlines for the following reasons:

  • Engaging third-party appraisers.
  • Reviewing appraisals.
  • Finalizing reports.

A Commercial Real Estate Firm Using Private Equity. This owner of industrial, flex and office properties had successfully created two private funds. Prior to launching a third fund, the owner realized she needed to boost processes because of inefficiencies around financial reporting, including internal valuation processes and appraisal reviews.

New operating guidelines incorporated commonly accepted best practices for a fair value reporting framework as well as documentation of internal valuations.

A Medical Office Private Equity Firm. This company, which invests in and develops medical office properties, was launching its first fund – in acquisitions and redevelopment – and realized it needed to update and expand its internal systems. The effort to develop operating guidelines focused on several objectives, including the need to hire additional staff and provide them with the tools to assist with fundraising. The company also implemented new employee training and hired new staff for acquisition and asset management functions, which incorporated fair value exercises such as appraisal reviews.

Whichever road a company takes in adopting and implementing operating guidelines, doing so can produce valuable insights into improving current operations, establishing a strategy for growth and attracting new capital.


By John Mackel, MAI, ASA, CCIM, director and real estate valuation consulting group leader, Moss Adams LLP,