Co-investment is one of the more elegant tools in private real estate fund structuring — when it works. It lets a sponsor deploy more capital into a deal that the main fund cannot fully absorb, deepen relationships with key investors, and pursue properties that would otherwise be too large or too concentrated for the fund’s mandate. For the investor, it offers something a blind-pool fund commitment cannot: the chance to evaluate and underwrite a specific deal before writing the check.
The complications start when the structure is designed for the immediate transaction rather than for the full life of the investment. Allocation policy that exists only in the sponsor’s head, waterfall mechanics that nobody modeled until after the documents were signed, a co-GP agreement that does not address how fees and promote are shared across the layers, or a sidecar SPV that was never given its own reporting system — these are not unusual problems. They are the predictable results of treating co-investment vehicles as a straightforward add-on to the main fund rather than as a separate legal and operational project.
This post covers the full landscape of co-investment structures in real estate funds: the different vehicle types and what each is suited for, how equity, promote, and fees are typically allocated across the stack, the governance and transfer mechanics that either protect or expose investors, the allocation policy questions that determine whether co-investment deepens LP trust or erodes it, and what sponsors should build into their documents before the first co-investor signs. If you are structuring a co-investment program or working through a specific deal-level vehicle, Crowdfund Lawyer can help you design it correctly before the transaction closes.
1. Why Co-Investment Exists — and What Problem It Actually Solves
A real estate fund operates under a set of constraints that its investment mandate defines: maximum single-asset concentration, target deployment pace, available capital, and the risk parameters the LP base signed up for. Those constraints are features, not failures. They protect diversification and ensure the fund does not become something different from what was disclosed.
The problem is that real estate deals are lumpy. A fund with a $150 million capital base and a 15% single-asset concentration limit has a practical ceiling of about $22 million per asset. A genuinely attractive acquisition opportunity might require $40 million in equity. Without co-investment, the sponsor either passes on the deal, stretches the fund’s concentration beyond its mandate, or takes on a capital structure that is more leveraged than the underwriting supports. None of those outcomes is good.
Co-investment solves the concentration problem cleanly. The fund takes its permissible share of the deal. A co-investment vehicle — an SPV, a sidecar, a co-GP arrangement — holds the rest, funded by investors who want exposure to that specific asset. The sponsor gets to do the deal. The fund stays within its mandate. The co-investors get a targeted opportunity they evaluated and chose. And if the allocation policy and economics are properly documented, the whole arrangement holds up to scrutiny from investors, auditors, and regulators.
That is the theory. The practice requires more careful design than sponsors typically budget for at the outset of a transaction.
2. The Three Core Co-Investment Structures
Co-investment in real estate funds is not a single structure. It is a family of structures, each of which fits a different sponsor objective, investor profile, and transaction type. The three most common are the co-GP joint venture, the deal-level SPV or sidecar, and the parallel vehicle. Understanding when each is appropriate requires understanding what problem it is designed to solve.
The Co-GP Joint Venture
In a real estate GP-LP joint venture, the sponsor holds the general partner or managing member position and controls the investment. When the sponsor wants to bring in additional equity capital at the GP level — either because it lacks sufficient capital to fund the GP contribution, needs a guaranty partner, or wants a strategic co-sponsor — it brings in a co-GP above the main LP structure.
The co-GP arrangement creates a second agreement that sits above the main property-level joint venture. The main JV governs the relationship between the overall GP consortium and the LPs contributing project equity. The co-GP agreement governs the relationship between the sponsor and its co-GP, including how the promote is divided, how fees are shared (or not), who makes operating decisions at the GP level, and how liability is allocated between the two sponsors if things go wrong.
Consider a deal in which the sponsor is purchasing a $60 million multifamily asset using $18 million of equity and $42 million of debt. The fund contributes $12 million of the equity as the LP. The sponsor is expected to contribute $6 million as the GP, but only has $2 million available without drawing on its management company reserves. A co-GP steps in with the remaining $4 million, takes a proportionate interest in the promote, and shares in the GP-level governance rights. The deal closes. Everyone is aligned on economics. Whether they are aligned on decision-making, exit timing, and the co-GP’s rights in a capital structure change depends entirely on how the co-GP agreement was drafted.
| ⚠️ The Co-GP Agreement Is a Separate Negotiation From the Main JV A sponsor who treats the co-GP arrangement as a handshake on top of the main joint venture documents is setting up an internal dispute for later. The co-GP agreement needs to specifically address: promote sharing mechanics and how they interact with the main JV waterfall; fee-sharing or fee-waiver arrangements between the sponsor and co-GP; which of them has final authority over operating decisions, financing decisions, and exit decisions; how the co-GP’s interest is treated if the property is refinanced, recapitalized, or sold before the planned exit; and what happens if the sponsor and co-GP disagree about a major capital decision. In development deals specifically, the co-GP agreement must address how cost overruns are funded, who is obligated to backstop them, and whether the co-GP indirectly bears promote on its own equity contribution. These are not hypothetical complications. They are the specific questions that surface in every contested co-GP relationship. |
The Deal-Level SPV and Sidecar
The special purpose vehicle — an independent legal entity formed to hold a single investment or isolate a defined set of obligations — is the most common co-investment wrapper in private real estate. When a fund sponsor identifies a deal that exceeds the fund’s concentration capacity, or when key LPs want direct deal-level exposure beyond their fund commitment, the sponsor forms an SPV alongside the main fund transaction.
The SPV holds the co-investment equity alongside the fund’s position. Investors in the SPV evaluate the specific deal before subscribing — they receive an investment memo, underwriting assumptions, deal-level financials, and proposed terms. They are not making a blind-pool commitment. They are investing in a named property or project based on disclosed diligence. That targeted visibility is a significant part of the appeal.
A sidecar is functionally a specific type of deal-level SPV. Carta describes sidecars as specialized structures, typically organized as SPVs, through which a GP pools capital from existing LPs for a specific investment opportunity. The key distinction from a standalone SPV is the relationship to the main fund: a sidecar is usually offered to existing LPs in the sponsor’s fund, giving them a way to increase their exposure to a particular deal that caught their attention during the fund’s deployment period. The main fund is the motorcycle, as the analogy goes. The sidecar is the attachment that lets a select group of passengers take the same route with additional capital for that specific leg of the journey.
SPVs and sidecars can be structured as Delaware LLCs or limited partnerships, with the choice depending on the investor base, tax objectives, and lender requirements. Because the SPV is a single-asset vehicle with no future deployment, 100% of committed capital is typically deployed immediately, which means investors avoid the management fee drag on undeployed capital that is common in closed-end funds. According to Carta’s analysis of over 2,400 SPVs, 56% charged no management fee at all in their 2024 dataset, and of those that did, the median fee was 1.9% on committed capital. Carry rates in SPVs also tend to be lower than main fund carry when the co-investor is a large LP negotiating deal-level economics as part of a broader relationship.
The Parallel Vehicle
A parallel vehicle is structurally different from a deal-level SPV or sidecar. Rather than being formed for one specific transaction, a parallel vehicle is a standing companion fund that invests alongside the main fund across a broader set of deals, typically on a pro-rata basis with each new acquisition. EY’s fund structures analysis describes parallel funds as separate legal entities that invest and divest alongside the main fund, usually pro rata, while addressing legal, tax, regulatory, accounting, or other investor-specific issues.
The use case for parallel vehicles in real estate is primarily investor-driven. A tax-exempt investor who cannot accept UBTI from debt-financed property income may need to participate through a specially structured parallel vehicle with a blocker entity. A foreign investor may need a parallel vehicle organized in a different jurisdiction to accommodate treaty benefits or local regulatory requirements. An insurance company investor governed by a specific solvency regime may need a vehicle with different leverage or liquidity characteristics than the main fund offers.
Parallel vehicles are more operationally complex than sidecars because they must maintain alignment with the main fund across every deal in the portfolio. Every acquisition decision, every capital call, every distribution event, and every governance action must be coordinated across both vehicles consistently. Parallel fund LPAs must be drafted to track closely with the main fund LPA, with variations documented specifically and applied consistently throughout the fund’s life.
| Structure Type | Primary Use Case and Key Characteristics |
| Co-GP Joint Venture | Best for: Sponsor needs additional GP-level equity or a guaranty partner for a specific deal. The co-GP receives a share of the promote in exchange for capital, liability exposure, or strategic value. Requires a separate co-GP agreement governing economics, decision authority, and exit rights among the sponsor entities. Most complex in terms of internal governance. |
| Deal-Level SPV / Sidecar | Best for: Main fund deal that exceeds concentration limits; existing LPs who want targeted exposure to a specific identified asset beyond their fund commitment. Formed at the transaction level for one property or project. Investors evaluate the deal before subscribing. Typically lower or no management fees; carry may be reduced or negotiated deal-by-deal. Dissolves after the asset is sold. |
| Parallel Vehicle | Best for: Investor-specific legal, tax, or regulatory requirements that cannot be accommodated within the main fund structure. A standing companion vehicle that co-invests pro-rata across all or most fund investments. More operationally complex than a sidecar because it must remain aligned with the main fund across the full investment period. Often used for tax-exempt, foreign, or insurance company LPs. |
3. Economics: How Capital, Promote, and Fees Are Structured
Equity Contributions and Sponsor Skin in the Game
The first economic question in any co-investment deal is who is contributing capital and on what terms. In the main LP structure, the answer is relatively simple: the LP contributes the bulk of project equity, the sponsor contributes a GP co-investment that typically ranges from 2% to 10% of total equity, and the LP expects the sponsor’s GP contribution to represent genuine skin in the game rather than a footnote.
In a co-GP arrangement, that calculation becomes more layered. The sponsor may be contributing its GP equity through a combination of its own capital, the co-GP’s capital, and fund-level commitments from the main fund. Whether the co-GP’s contribution counts as sponsor skin in the game from the perspective of the main fund’s LPs depends on how the co-GP relationship is documented and disclosed. A co-GP who is contributing capital in exchange for promote participation but has no independent liability exposure is in a meaningfully different position than one who is backing loan guarantees alongside the sponsor.
Disclosure of sponsor and co-GP equity contributions matters not just for LP confidence but for ILPA compliance. ILPA Principles 3.0 recommends that GP co-investments be funded in cash rather than through fee waivers or specialized financing, and that the GP’s overall equity interest be consistent across deals rather than cherry-picked toward the most promising opportunities. A sponsor whose co-investment contribution varies deal-by-deal in ways that correlate with deal quality is creating exactly the alignment concern that ILPA’s guidance is designed to flag.
The Distribution Waterfall in Co-Investment Vehicles
Every co-investment vehicle needs its own waterfall — and that waterfall needs to be specifically modeled against the expected economics of the deal before the documents are signed, not drafted from a template and assumed to work out correctly.
A basic deal-level waterfall for a co-investment SPV typically follows the same general logic as a main fund waterfall: return of invested capital to investors, payment of any accrued preferred return, then a split of remaining profits between investors and the sponsor (promote or carried interest). The specific mechanics depend on negotiation, but common benchmarks for real estate co-investments include an 8% preferred return and a 70/30 or 80/20 profit split above the hurdle.
In a co-GP structure, the waterfall becomes more complicated because the sponsor has one profit-sharing arrangement with the LPs in the main joint venture and a separate internal sharing arrangement with the co-GP. The co-GP typically receives a share of the sponsor’s promote in proportion to its capital contribution at the GP level. But the specific mechanics — whether the co-GP bears promote on its own equity indirectly, how broken-deal expenses are allocated between the co-GPs, whether there is a clawback between the sponsor and co-GP if early distributions exceed final performance — must be resolved in the co-GP agreement itself. Leaving those questions to be figured out at exit, when economics are real and the deal’s outcome is known, is how co-GP arrangements turn into arbitration proceedings.
Fee Economics in SPVs and Sidecars: What the Data Shows
One of the most commercially appealing aspects of co-investment structures for LPs is the fee load. Because the SPV is a single-asset vehicle in which capital is deployed immediately, there is no management fee on undeployed capital, no vintage-year fee drag during a multi-year investment period, and — in many cases — no management fee at all.
Carta’s 2024 analysis of 2,442 SPV structures found that 44% charged any management fee, with the median fee among those that did at 1.9% on committed capital. That means the majority of deal-level SPVs operate without any ongoing management fee. Carry rates in co-investment vehicles tend to be lower than main fund carry as well, particularly when the co-investor is a large LP negotiating deal-level economics in the context of an existing relationship.
The economic questions the sponsor must answer before the co-investment is offered include:
- Is there a management fee, and if so, on what basis? On committed capital (common in funds), on invested capital (common once the deal closes), or not at all? ILPA specifically recommends written disclosure of any differentiated fee economics in co-investment vehicles.
- Is there a promote, and how is it calculated? At the deal level (returns on this specific asset) or at a full-fund level (returns across the whole portfolio)? A deal-level promote gives the co-investor cleaner economics tied to one asset. A full-fund promote blends co-investment performance into a broader calculation.
- How are broken-deal expenses allocated? When diligence is conducted on a transaction that does not close, who bears the legal, travel, and due diligence costs? ILPA recommends that broken-deal expenses be shared on a pro-rata basis among the fund and any parallel vehicles or co-investors that would have participated in the deal.
- Are transaction fees offset against the promote or management fee? Acquisition fees, disposition fees, and financing fees earned by the sponsor or its affiliates should be disclosed specifically, and the offset mechanics (if any) should match what is disclosed in the main fund documents.
4. Governance, Control, and Investor Rights
Decision Authority in Co-Investment Vehicles
The governance design of a co-investment vehicle reflects a fundamental tension: the sponsor wants to run the investment without a committee meeting every time a leasing decision needs to be made, while the investor wants enough oversight to protect capital in a concentrated single-asset vehicle with limited diversification.
The standard resolution is a distinction between major decisions and operating decisions. Major decisions — refinancing, sale, material capital expenditures above a defined threshold, admission of new investors, structural changes to the vehicle — typically require LP or co-investor consent or at least advance notice. Operating decisions — leasing, routine maintenance, vendor selection, day-to-day property management — rest with the GP or manager acting alone under the governing documents.
Where that line is drawn, and how clear the document is about where it falls, determines whether governance becomes a productive oversight mechanism or a source of operational friction. A co-investment agreement that requires LP consent for every capital expenditure above $50,000 at a large multifamily property is creating an approval queue that will frustrate the property manager and delay routine maintenance. An agreement that gives LPs no consent rights at all over anything leaves concentrated investors without the protection they need to justify the commitment to their internal investment committees.
Tag-Along, Drag-Along, and Transfer Mechanics
Because co-investment vehicles are single-asset structures with no built-in portfolio diversification, transfer and exit provisions carry more weight than they do in a main fund. An LP in a diversified fund has an interest in a portfolio of assets and can evaluate its position holistically. A co-investor in a single-property SPV is entirely concentrated in one outcome and has no portfolio buffer if the asset underperforms or the exit timeline extends beyond expectations.
Tag-along rights give minority co-investors the right to participate in a sale if the majority initiates one. Without a tag-along, a controlling sponsor could sell the asset on terms that reflect its own priorities and timeline while minority investors are locked in. Drag-along rights work in the opposite direction: they give the controlling party the right to require minority holders to join a sale so that a small holdout cannot block a transaction that is in everyone’s economic interest.
Transfer restrictions in co-investment vehicles are typically more restrictive than in the main fund because the investor base is smaller and the economic impact of a transfer is more visible. Standard provisions include GP consent requirements before any transfer, right of first offer or right of first refusal in favor of the other investors or the GP, and eligibility requirements that limit transfers to investors who meet the accreditation, tax, and jurisdictional standards required by the vehicle. In real estate SPVs with lender consent requirements built into the financing, transfers may also need lender approval — a constraint that must be disclosed to co-investors before they subscribe, not discovered when they try to exit.
Reporting Standards: The Obligation the Sponsor Cannot Offload
Co-investment vehicles are sometimes treated operationally as afterthoughts to the main fund — no dedicated reporting system, no independent fund administrator, quarterly updates generated from the same memo that went to the main fund LPs. That approach creates problems that compound over time.
A co-investor in a specific asset needs to know how that asset is performing: occupancy, rent roll, debt service, capital expenditure progress, valuation, and any material events affecting the property or its financing. The main fund’s quarterly report may include a paragraph about the asset, but a paragraph is not the same as the deal-level transparency a concentrated investor needs to fulfill its own reporting obligations internally.
ILPA’s updated 2025 Reporting Template, released as part of its Quarterly Reporting Standards Initiative, emphasizes that reporting should reflect the actual complexity of the investment structure, including co-investment vehicles and their specific performance metrics. For real estate funds using subscription facilities, the updated template also requires disclosure of facility terms, utilization, and the impact on IRR with and without the facility. Co-investment vehicles that benefit from or are affected by the fund-level subscription facility should be addressed in the reporting package, not omitted because the fund administrator’s template doesn’t have a field for them.
| 📌 Reporting Is Not a Favor to Co-Investors — It Is a Legal Obligation A co-investment agreement that promises quarterly financial statements and material event notices is a contract. When the fund administrator produces quarterly reports six weeks late, or when the sponsor sends an email about a material lease termination four months after it happened because ‘we were in the middle of a refinancing,’ that is not just bad investor relations. It is a breach of the governing documents. The operational answer is to assign specific reporting responsibilities for each co-investment vehicle at the time of formation: who produces the reports, on what timeline, in what format, and who reviews them before they go out. If the fund administrator is not equipped to produce deal-level reports for individual SPVs, that needs to be resolved at the outset of the vehicle’s formation, not after the first LP complaint. |
5. The Allocation Policy: The Question Sponsors Avoid Until They Have To Answer It
Co-investment works well when it is governed by a clear, written, consistently applied allocation policy. It becomes a governance problem when that policy does not exist, exists only in informal practice, or is applied in ways that look like the sponsor is directing attractive deals to favored investors while channeling concentration risk or lower-quality opportunities to the main fund.
ILPA Principles 3.0 is direct on this point: all suitable investment opportunities should first be allocated to the main fund if the opportunity fits the fund’s investment strategy, investment size, and available commitments. Co-investment capital is supplemental — it helps absorb deal size that exceeds the fund’s capacity, not a parallel program through which the sponsor can offer its best deals to selected investors. The policy should describe how co-investment opportunities are allocated and why specific opportunities are offered outside the main fund, with those policies disclosed in writing to all LPs.
The cherry-picking risk is real. A sponsor managing both a main fund and an active co-investment program could, in theory, direct its highest-conviction deals to co-investment vehicles where the sponsor’s own economics are more favorable, while the main fund receives proportionally more concentration risk, longer-dated assets, or lower-quality opportunities. ILPA recommends written allocation frameworks specifically because informal practice is not auditable — and the only way to demonstrate that co-investment is being used for its stated purpose (capacity management, relationship deepening, legitimate concentration relief) rather than as a tool for preferring selected investors is to have a policy that can be tested against actual deal history.
| ⚠️ The Allocation Policy Must Come Before the Co-Investment Program, Not After the First Dispute The moment a large LP discovers that it was not offered a co-investment opportunity that a competing LP received, and the opportunity turned out to be the fund’s best-performing asset, the allocation question becomes urgent. The sponsor’s options at that point are limited: produce a pre-existing written policy that explains the allocation decision, or explain the decision without one and hope the LP finds the explanation satisfying. A written allocation policy that existed before the co-investment program launched is not a guarantee against disputes. But it transforms the dispute from a ‘who did the sponsor favor and why’ question into a ‘did the sponsor follow its own stated process’ question, which is a much more manageable conversation. Build the policy before the first co-investment closes. Make it specific enough to apply consistently and general enough to preserve the GP’s legitimate discretion over deal-by-deal decisions. |
A workable allocation policy for a real estate fund with an active co-investment program typically addresses:
- When a deal is eligible for co-investment: The deal exceeds the fund’s single-asset concentration limit; the deal is an identified opportunity that specific investors have expressed interest in; the deal involves a property type or geography outside the fund’s primary mandate but within a disclosed co-investment scope.
- Who is offered co-investment opportunities: All LPs with contractual co-investment rights, in proportional order; selected LPs based on strategic relationship criteria disclosed to all LPs; LPs who have specifically indicated interest in the relevant asset type or geography.
- How the timeline is managed: How much advance notice co-investors receive before the decision window closes; what information is provided and in what format; how decisions are confirmed and documented.
- How conflicts are handled: What happens when a co-investor’s rights compete with another LP’s rights; when LPAC review is required; how the sponsor discloses its own co-investment in the deal alongside outside investors.
6. The Risks That Co-Investment Documents Need to Address
Co-investment structures are not inherently riskier than the main fund. But the risks are concentrated rather than diversified, and the governance obligations are deal-specific rather than portfolio-level. That combination means co-investment problems tend to arrive suddenly rather than gradually.
Concentration and the Limits of Visibility
The same feature that makes co-investment attractive to investors — direct, identified exposure to a specific deal — is also its primary risk. The investor is not backing a strategy or a portfolio. It is backing one property, in one market, with one capital structure, at one point in time. If the market turns, if the tenant leaves, if the construction costs overrun, if the refinancing fails, the co-investor absorbs that outcome without the portfolio diversification that softens similar events in the main fund.
Sponsors sometimes undersell this risk in the co-investment pitch because the identified asset looks compelling at underwriting. The more complete picture is: the co-investor is accepting the same concentration risk that the fund’s mandate was specifically designed to limit. That is a legitimate choice for an investor with appropriate risk capacity and sector conviction. It is a less legitimate choice for an investor who did not fully understand what ‘direct deal-level exposure’ means in a year when multifamily cap rates moved 150 basis points.
Compressed Timelines and Diligence Adequacy
Co-investment opportunities are typically offered under time pressure because the deal has a closing timeline that cannot wait for a lengthy subscription process. A co-investor who has 10 business days to review an investment memo, request additional diligence materials, conduct its own analysis, obtain internal investment committee approval, and execute subscription documents is not in the same position as an LP who had months to evaluate the main fund’s blind-pool strategy.
That compressed timeline creates two problems. First, the co-investor may not conduct adequate diligence, which becomes an issue when the deal underperforms and the investor claims it was not given sufficient information or time to evaluate the opportunity properly. Second, the sponsor may not provide sufficient materials, either because the transaction timeline is genuinely tight or because the package that goes to co-investors is thinner than what went into the main fund’s investment committee memo.
The solution is to establish a diligence package standard for co-investment offerings before the first one is launched. What materials will always be provided? What is the minimum decision window? Who is responsible for ensuring the package is complete before it goes out? An investor who receives a ten-page memo with three-year projections and no lease-level details has not been given what it needs to make an informed co-investment decision in real estate.
Governance Mismatch and Decision Rights Conflicts
When a co-investor holds a significant position in an SPV alongside the main fund, and the main fund’s governing documents give the GP certain discretionary authorities, the co-investor may have rights under the SPV documents that conflict with those discretionary authorities. The most common friction point is exit timing: the main fund’s investment period is ending, the GP wants to sell an asset to realize gains and meet the fund’s distribution obligations, but the co-investor in the SPV would prefer to hold longer to optimize its deal-level returns.
Resolving that conflict requires the SPV documents to have specifically addressed the relationship between the main fund’s exit timeline and the co-investor’s rights. If the SPV agreement simply says the asset will be sold when the main fund exits, the co-investor has accepted that constraint. If it says the co-investor has independent approval rights over the sale, the sponsor may be unable to exit the asset when the fund’s timeline requires it. Neither outcome is categorically wrong, but the right answer has to be chosen before the documents are signed — not negotiated retroactively when the main fund’s LPs are asking why the asset has not been sold.
7. Co-Investment Documentation: What Must Be in Place Before the First Investor Signs
| Document / Provision | Key Decisions and Drafting Priorities |
| Written allocation policy | Defines when deals are eligible for co-investment; who receives offers and in what order; minimum decision window and diligence package standard; how conflicts among competing investor rights are resolved. Must exist before the co-investment program launches. Disclosure to all LPs recommended by ILPA. |
| SPV or sidecar governing documents | Operating agreement or LP agreement for the co-investment vehicle; identifies the manager or GP; defines major vs. operating decisions; establishes voting and consent thresholds; addresses capital call mechanics, default remedies, and distribution waterfall specific to this vehicle. |
| Co-GP agreement (if applicable) | Governs the relationship between the sponsor and any co-GP; defines promote sharing and fee-sharing mechanics; establishes decision authority at the GP level; addresses cost overruns, loan guaranty obligations, and clawback between the co-GPs if early promote distributions exceed final performance. |
| Fee and carry disclosure | Management fee rate, basis, and offset mechanics; carry rate and calculation basis (deal-level or full-fund); broken-deal expense allocation; transaction fee disclosure and offset against management fee or promote. Must be consistent with main fund disclosure. |
| Subscription agreement and investor questionnaire | Accreditation confirmation; investment intent and restricted securities acknowledgment; ERISA status (if applicable); AML/OFAC representations; entity authority. Must be calibrated to the offering exemption used for the co-investment vehicle. |
| Tag-along and drag-along provisions | Tag-along: minority co-investors can participate in sponsor-initiated sales; terms must be specified (pro-rata participation, same price and form of consideration). Drag-along: majority can compel minority participation in a sale; threshold for triggering must be defined and minority protections specified. |
| Transfer restrictions | GP consent requirement before any transfer; right of first offer or refusal mechanics; eligibility requirements for transferees; lender consent provisions where applicable. Must be disclosed to co-investors before subscription. |
| Exit and liquidation provisions | Relationship between main fund exit timeline and co-investor rights; forced sale provisions if the main fund reaches end of term; buy-sell mechanics if co-investors and the sponsor disagree on exit; distribution mechanics on sale proceeds. |
| Reporting obligations | Specific reports required, format, frequency, and delivery timeline; who produces the reports; material event notice requirements and timeline; access to deal-level financial data, valuation methodology, and capital account statements. |
| Subscription facility disclosure (if applicable) | Whether the main fund’s subscription facility benefits or affects the co-investment vehicle; IRR with and without facility utilization; ILPA 2025 Reporting Template requirements for fund-level leverage disclosure. |
| Co-Investment Is a Capital Strategy — Build the Legal Infrastructure to Match The commercial case for co-investment in real estate funds is compelling: larger deals, deeper investor relationships, better capital efficiency, and more tailored exposure for sophisticated investors who want it. Those benefits are real. They are also only realizable if the structure is built correctly — with a written allocation policy that can withstand LP scrutiny, co-GP agreements that address the hard questions before the relationship is tested, SPV governing documents that give co-investors the rights they need without creating operational gridlock, and a reporting system that treats each vehicle as a separate compliance obligation rather than an afterthought to the main fund. The sponsors who treat co-investment structures as a quick legal accommodation to close a deal faster tend to discover the structural gaps at the worst possible moment: when the deal is under stress, the co-investor is asking questions the documents don’t answer, and the allocation policy that never existed becomes Exhibit A in a dispute about whether the sponsor acted in everyone’s interest. |