What due diligence and allocation rules apply to multifamily office co-investments?
Co-investments require documented review of the sponsor, asset, structure, fees, conflicts, and exit terms. Investor eligibility may depend on accredited investor or qualified purchaser rules. Allocation usually follows fund documents and disclosed policies. Advisers must handle conflicts fairly, explain allocation methods, and avoid favoring investors without proper disclosure and informed consent.
Eligibility and offering rules
Many multifamily office co-investments are offered through private placements or private funds. Under SEC Regulation D, an individual may qualify as an accredited investor with net worth of at least $1 million excluding a primary residence, or income above $200,000 alone, or $300,000 with a spouse or partner, in each of the prior two years with a reasonable expectation of reaching the same level in the current year. The SEC also recognizes certain licensed professionals and qualifying family office clients. (SEC, Accredited Investors)
A fund relying on Section 3(c)(1) generally may have no more than 100 beneficial owners. A Section 3(c)(7) fund is limited to qualified purchasers. A natural person generally meets the qualified purchaser investment test with at least $5 million in investments. (SEC, Glossary)
For Rule 506(b) offerings, no more than 35 non-accredited investors may participate, and those investors must meet a sophistication standard. Issuers using Regulation D must file Form D no later than 15 days after the first sale. A Form D is not SEC approval. (SEC, Rule 506(b); SEC, Private Placements Investor Bulletin)
Due diligence we expect
We review the sponsor's track record, ownership, litigation and regulatory history, references, financial capacity, and decision process. At the asset level, we examine leases, rent rolls, occupancy, collections, operating expenses, capital plans, debt terms, insurance, environmental matters, zoning, and the assumptions supporting the business plan.
We read the private placement memorandum, subscription agreement, operating agreement, and fee schedule together. We confirm who controls the investment, how capital calls work, what reporting investors receive, transfer limits, voting rights, removal rights, and the waterfall. The SEC warns that private placement documents may not be reviewed by a regulator, may provide limited disclosure, and may be illiquid for an indefinite period. (SEC, Private Placements under Regulation D)
We also test downside cases. Can the investment withstand lower occupancy, slower rent growth, higher interest costs, or a delayed sale? We document unanswered questions and obtain written responses before committing.
Too many investors think they don't have time to conduct thorough due diligence, so they invest almost exclusively based on referrals. The problem is that those other people may have been investing based on a referral or perhaps skipped completing their own due diligence. You must always conduct your own due diligence.
Allocation and conflicts
There is no universal rule requiring pro rata allocation of co-investment opportunities. The SEC says an adviser may use another method when it is consistent with client objectives, disclosed policies, and fiduciary duties. The adviser must eliminate conflicts or provide full and fair disclosure detailed enough for informed consent. (SEC, Commission Interpretation Regarding Standard of Conduct for Investment Advisers)
The governing documents should state who is eligible, how opportunities are offered, response deadlines, minimums, oversubscription procedures, allocation among funds and family clients, and how fees and broken-deal expenses are assigned. The SEC has observed problems when advisers failed to follow disclosed allocation procedures or gave investors inequitable allocations without adequate disclosure. (SEC, Private Fund Risk Alert)
Our practical rule is simple: use a written process, apply it consistently, keep an audit trail, disclose exceptions, and explain conflicts before investors commit. This page is educational and does not provide legal, tax, or investment advice.
Related guides
- Family Office Due Diligence: A Practical Guide for Multifamily Offices
- Family Governance With a Multifamily Office
- MFO vs SFO vs RIA vs Private Bank: Which Fits Your Family?
Sources
- SEC, Accredited Investors
- SEC, Glossary of Capital Formation Terms
- SEC, Private Placements Under Regulation D, Investor Bulletin
- SEC, Private Placements, Rule 506(b)
- SEC, Commission Interpretation Regarding Standard of Conduct for Investment Advisers
- SEC, Observations From Examinations of Investment Advisers Managing Private Funds