In September 2023, the SEC charged Prime Group Holdings LLC, a private equity firm focused on self-storage real estate, with failing to adequately disclose millions of dollars of brokerage fees paid to a firm wholly owned by Prime Group’s own CEO. Between 2017 and 2021, that affiliated brokerage received nearly $18 million in fees on the fund’s property acquisitions. Prime Group agreed to pay $6.5 million in civil penalties and more than $14 million in disgorgement and prejudgment interest to settle the charges.
The disclosure failures in that case did not appear only in the PPM or the limited partnership agreement. They appeared in the fund’s due diligence questionnaire. The generic DDQ stated that sourcing was done internally and denied the use of a broker, when in fact the fund was consistently paying a 3% brokerage fee to an affiliate. When institutional investors sent customized DDQs that asked specifically about brokerage fees and affiliates, those responses also omitted the relevant information. The SEC found that Prime Group violated Section 17(a)(2) of the Securities Act, a securities fraud provision that does not require intentional conduct and can be based on ordinary negligence.
That enforcement action carries a direct and practical lesson for real estate sponsors conducting private offerings: the due diligence questionnaire is not an administrative intake form. It is a disclosure document. The representations made in it are subject to the same antifraud standards as the PPM, the LPA, and the subscription agreement. And it is a document that institutional investors use specifically to test whether the formal offering materials are telling the complete story about fees, conflicts, and affiliate arrangements.
This post addresses how sponsors should design and use due diligence questionnaires to strengthen their disclosure process, what the DDQ must cover in a private real estate offering, and where the most consequential gaps appear in practice.
What a Due Diligence Questionnaire Is and What It Must Do
A due diligence questionnaire is a structured document used to gather material facts about the sponsor, the offering, the property, the business plan, and the conflicts and compensation arrangements that affect investor outcomes. It sits upstream from the PPM and the other formal offering documents in the disclosure process: its function is to surface facts that must be disclosed, test whether the sponsor’s internal knowledge is fully captured in the documents investors will receive, and create a factual record that supports the accuracy of those documents.
In practice, DDQs are circulated in two distinct directions. Internally, the sponsor uses a DDQ as an intake tool, systematically collecting information from the acquisitions team, asset management, finance, legal, and investor relations before offering documents are drafted. Externally, institutional investors and placement agents send DDQs to sponsors as part of their own diligence process, asking for information that supplements the formal offering package. The Prime Group enforcement action involved failures in both directions: the sponsor’s own offering materials omitted material information, and the responses to investor-sent DDQs omitted the same information when investors specifically asked for it.
A DDQ is not a checkbox exercise and it is not a template to be completed once and filed away. It is a fact-gathering instrument whose outputs must be tested against the offering documents, updated when facts change, and reviewed by someone with the legal knowledge to identify the gap between what a question asked and what the answer disclosed. The SEC’s enforcement action against Prime Group under Section 17(a)(2) confirmed that negligent omissions in DDQ responses create securities fraud exposure independent of whether the PPM itself contained the same omission. The DDQ and the offering documents create a combined disclosure record, and each is evaluated independently.
The Prime Group Case: What Went Wrong and Why It Matters for Real Estate Sponsors
The Prime Group enforcement record reveals a disclosure failure pattern that is common in private real estate fund structures. The sponsor had an affiliate compensation arrangement that was economically significant: a 3% brokerage fee on every acquisition, paid to a firm wholly owned by the CEO, totaling nearly $18 million over four years. That arrangement was material by any reasonable measure, and its disclosure would have been straightforward had anyone treated it as a disclosure obligation rather than an internal business arrangement.
Instead, the PPM disclosed a 1% acquisition fee and a 5% property management fee paid to affiliates but omitted the 3% brokerage fee entirely. The LPA used permissive language suggesting that the GP may engage affiliates to render services, without specifically disclosing that an affiliate was receiving brokerage fees on every transaction. When investors sent customized DDQs asking specifically about brokerage fees and affiliates, those responses continued to omit the information.
The Arnold & Porter analysis of the enforcement order identified a specific principle the SEC applied: disclosures describing a potential conflict as something that may occur are insufficient when the sponsor knows the conflict actually exists. Hypothetical disclosure language of the form the manager may have conflicts of interest does not satisfy the antifraud standard when the specific conflict is known and ongoing. That principle has direct implications for any real estate offering document that describes affiliate arrangements, fee streams, or related-party transactions using permissive or hypothetical language when the actual arrangements are specific and definitive.
The SEC’s Chief of the Complex Financial Instruments Unit stated the broader enforcement message in the press release: funds investing in alternative asset classes must ensure that their offering materials contain clear, accurate, and adequate disclosures, and information related to payments made to affiliates and the potential conflicts of interest embedded in such arrangements is critical to investor decision-making. For private real estate sponsors, that statement describes exactly the category of information that DDQ processes most commonly fail to capture and disclose adequately.
| 📌 Section 17(a)(2): The Provision That Does Not Require Intent The Prime Group enforcement order was brought under Section 17(a)(2) of the Securities Act of 1933, not under the more commonly cited Section 10(b) or Rule 10b-5. That choice matters for a specific reason. Section 17(a)(1) and Section 10(b) with Rule 10b-5 require scienter, meaning the sponsor must have acted with intent to deceive or with reckless disregard for the truth. Those provisions require the SEC to prove that the sponsor knew its disclosure was false or misleading and made it anyway. Section 17(a)(2) requires only negligence. It prohibits obtaining money or property through a material misstatement or omission in the offer or sale of securities, without requiring proof that the misstatement was intentional. A sponsor who omits a material conflict because no one in the organization thought to ask whether the affiliate arrangement needed to be specifically disclosed has committed a Section 17(a)(2) violation if the omission was the product of inadequate disclosure process rather than deliberate concealment. That distinction means the absence of fraudulent intent is not a defense to the disclosure obligation. The obligation is to provide accurate and complete disclosure, and negligence in meeting that obligation creates the same enforcement exposure under Section 17(a)(2) that intentional fraud creates under Section 17(a)(1). A DDQ process that is designed carelessly, completed by internal teams without legal review, or treated as a formality rather than a fact-gathering exercise creates exactly the conditions for a Section 17(a)(2) violation even where no one intended to mislead anyone. |
What a Real Estate Offering DDQ Must Cover
Sponsor Background, Structure, and Track Record
The sponsor section of the DDQ must capture more than a biographical summary. It should document the specific entity structure showing the relationships among the sponsor, the GP entity, the management company, and all affiliated entities that will interact with the fund or the property. It should document each principal’s specific investment responsibilities and their track record by asset class, not as a resume of titles but as an account of actual deal outcomes. And it should document the litigation, regulatory, bankruptcy, and disciplinary history of covered persons, which is both a Regulation D bad-actor diligence requirement and a material disclosure item for investors evaluating management credibility.
The Prime Group case illustrates why structural disclosure requires more than organizational charts. The CEO’s ownership of the affiliated brokerage was visible from the organizational structure of the firm, but that ownership was never translated into a specific disclosure of the compensation flowing from the fund to that entity. A DDQ that captures the organizational structure must go further and ask, for each affiliated entity, what services it will provide to the fund, on what terms, and how much it will receive. That level of specificity is what the antifraud standard requires and what investor DDQ responses specifically test.
Property-Level Facts and Business Plan Assumptions
The property section of the DDQ must capture the deal-specific facts that determine whether the offering’s projections are defensible. Current occupancy, rent roll details, tenant concentration, lease rollover schedule, deferred maintenance, capital expenditure requirements, zoning or entitlement status, environmental findings from Phase I or Phase II assessments, title and survey matters, insurance assumptions, and the condition of existing property management are all facts that belong in the DDQ’s factual record before they appear as inputs to the financial model.
This is the section where the gap between internal optimism and documented fact most commonly appears. A business plan may assume lease-up at a specific pace, renovation completion on a specific timeline, or rent growth at a specific rate, without any third-party report, contractor bid, or market study supporting those assumptions. A DDQ that requires the acquisitions team to identify the evidentiary basis for each major assumption, and to flag assumptions that rest on judgment rather than documented evidence, forces the drafting team to understand where the projections are strong and where they depend on favorable outcomes that may not materialize.
Financial Data, Capital Structure, and Fee Disclosure
The financial section of the DDQ should capture the sources and uses of funds in a format that can be traced to the PPM’s use-of-proceeds disclosure. It should capture the debt terms in a format that can be compared to the PPM’s description of the financing. And it must capture every fee, compensation arrangement, and expense reimbursement that the sponsor or any affiliate will receive, identified specifically by recipient, amount or rate, and the transaction or event that triggers payment.
The Prime Group case makes the consequence of incomplete fee disclosure concrete: omitting the 3% brokerage fee from a PPM that disclosed a 1% acquisition fee and a 5% property management fee created a misleading presentation of how much compensation the sponsor group was receiving from the fund. A DDQ that asks about every fee, compensation arrangement, and affiliate payment, not just the fees that appear in the standard fee table, is the instrument that surfaces the omission before it becomes a disclosure failure. The question to ask in the DDQ is not whether the sponsor receives a fee of the types listed in the template. The question is whether any person or entity with any affiliation to the sponsor receives any payment from the fund or any party to a fund transaction.
Conflicts of Interest: From Permissive Language to Specific Disclosure
The conflicts section of the DDQ is where the Prime Group enforcement action delivers its most direct practical lesson. Permissive disclosure language describing what a sponsor may do is legally insufficient when the sponsor already knows what it is doing. A DDQ that asks in abstract terms whether any conflicts of interest exist will produce abstract responses. A DDQ that asks specifically whether any principal, affiliate, or entity related to any principal or affiliate receives any payment from the fund, its properties, or any transaction involving the fund will produce the information that disclosure requires.
For a real estate sponsor, the specific conflict categories that the DDQ must address include acquisition, disposition, and leasing brokerage fees paid to affiliates; property management, construction management, and development management fees paid to affiliates; loan origination, guaranty, or financing fees paid to affiliates; expense reimbursements and overhead allocations that flow from the fund to affiliated entities; allocation of deal opportunities across multiple funds managed by the same sponsor; co-investment arrangements that give the sponsor or its principals preferential access to specific investments; and personal investments by principals in properties or businesses that compete with or interact with the fund’s investments. Each of those categories corresponds to an actual disclosure failure in recent SEC enforcement actions, and each must be addressed specifically rather than through hypothetical language.
Using the DDQ to Test Cross-Document Consistency
The most valuable function of the sponsor’s internal DDQ is not the individual answers it produces. It is the systematic comparison of those answers against the offering documents to identify where the documents describe the offering differently from how the DDQ describes it. That comparison, performed before the offering launches and again whenever the offering is materially updated, is the step that converts the DDQ from an intake form into a disclosure quality control tool.
The specific comparisons that most reliably identify disclosure gaps include comparing the DDQ’s fee and compensation section against every document in the offering package that describes fees or expenses, because the Prime Group case confirmed that a fee described in one section of the PPM can be obscured or omitted in another; comparing the DDQ’s assumption-by-assumption description of the business plan against the financial model to confirm that the model’s inputs match the sponsor’s actual diligence conclusions rather than optimistic adjustments; comparing the DDQ’s description of the sponsor’s organizational structure and affiliate relationships against the conflicts section of the PPM to confirm that every compensation-generating relationship is specifically identified; and comparing the DDQ’s description of the investor qualification process against the representations in the subscription agreement to confirm that the representations match the actual process being used.
The cross-document comparison should produce a written reconciliation record, not just a verbal confirmation from counsel that the documents look consistent. The written record demonstrates that the comparison was performed, identifies the items that required revision, and documents how each gap was resolved. That record is the evidence that a regulatory examiner or opposing counsel will want to see if a disclosure question arises after the offering closes.
Responding to Investor-Sent DDQs: The Additional Exposure Layer
Institutional investors who conduct serious due diligence on private real estate fund offerings typically send their own DDQs to the sponsor. Those investor-generated DDQs are designed precisely to test whether the formal offering documents tell the complete story. They ask about specific categories of fees, specific affiliated entities, specific prior deal outcomes, and specific governance arrangements that generic offering documents may describe at a level of generality that leaves room for the kind of omission the Prime Group case documents.
An investor-sent DDQ that asks specifically about brokerage fees paid to affiliates and receives a response that denies the existence of any such fees is a disclosure failure with direct legal consequences, as the Prime Group record confirms. That failure occurs even if the sponsor’s internal view was that the brokerage arrangement was not the kind of conflict the question was designed to capture. The antifraud standard asks whether the response was materially accurate and non-misleading from the perspective of the investor who asked the question, not from the perspective of the sponsor’s characterization of its own arrangements.
Managing investor-sent DDQ responses requires the same discipline as managing the formal offering documents. Responses should be reviewed by legal counsel before delivery. They should be compared against the offering documents to confirm consistency. They should be maintained as part of the offering’s disclosure record rather than treated as informal correspondence. And they should be updated if facts change after the initial response is delivered, for the same reason that the PPM must be updated when material facts change during the offering period.
| ⚠️ The Five DDQ Failures That Most Frequently Create Disclosure Exposure 1, Using hypothetical or permissive language to describe arrangements that already exist. The SEC’s Prime Group enforcement order reflects the principle that disclosures suggesting a sponsor ‘may have’ a conflict are insufficient when the sponsor knows the conflict actually exists. A DDQ that describes actual affiliate compensation arrangements using conditional language creates the same inadequate disclosure as a PPM that does. 2. Completing the conflicts section at too high a level of generality. A response confirming that the sponsor has conflicts management procedures does not disclose what the specific conflicts are. The DDQ must identify each affiliated entity that receives compensation from the fund or any fund transaction, the specific amount or rate of that compensation, and the basis on which it is paid. 3, Failing to compare DDQ responses against the offering documents before distribution. A DDQ that is completed by the acquisitions team and delivered to investors without a legal review comparing its content against the PPM, LPA, and subscription agreement creates risk that the two documents describe the same arrangements differently, creating the kind of inconsistency that investors and regulators specifically look for. 4, Treating investor-sent DDQ responses as informal correspondence rather than disclosure documents. Responses to investor-generated DDQs are subject to the same antifraud standard as the PPM. They should be reviewed by legal counsel, compared against the formal offering documents, and maintained as part of the offering record. 5. Not updating DDQ responses when facts change during the offering period. A DDQ completed accurately in month one of a six-month raise may become materially inaccurate by month four if the sponsor’s affiliated service providers, fee arrangements, or conflict profile have changed. The same obligation to update offering documents when material facts change applies to DDQ responses that have been delivered to investors. |
Building a DDQ Process That Functions as a Disclosure Control
The DDQ is most valuable when it is integrated into the sponsor’s disclosure control framework as a systematic step in the offering process rather than a document produced on request. As addressed in the prior post in this series on disclosure controls for real estate sponsors, the disclosure framework that withstands scrutiny is built before the offering launches, maintained throughout the raise, and documented thoroughly enough to answer the questions that arise after the offering closes.
An integrated DDQ process begins with a comprehensive internal intake questionnaire completed by each functional team before offering documents are drafted. The acquisitions team provides the deal facts, business plan assumptions, and documented basis for projections. The finance team provides the financial model support, sources and uses, and fee table. Legal provides the conflicts analysis, regulatory status, and bad-actor diligence. The management team provides the sponsor background, track record, and organizational structure. That intake is reviewed by legal counsel for completeness, with specific attention to the gaps between what was asked and what was answered and to the conflicts categories that DDQs most consistently underreport.
The resulting factual record is then compared against each document in the offering package before distribution. Discrepancies are resolved by revising either the document or the DDQ response, with a written record of the resolution. Investor-sent DDQs are reviewed by legal counsel before responses are delivered, compared against the internal DDQ and the current offering documents, and maintained in the offering file. When material facts change during the raise, both the offering documents and any prior DDQ responses are evaluated for update requirements.
That process produces a disclosure record that is defensible not only in the sense that it accurately reflects the facts the sponsor knows, but also in the sense that it demonstrates the sponsor took the disclosure obligation seriously, conducted a systematic review, and responded to gaps rather than leaving them unresolved. That demonstration of process is often what separates a disclosure failure that results in enforcement action from one that results in investor confidence.
The DDQ Is a Legal Document. It Should Be Treated as One
The Prime Group enforcement action is useful not because it describes an unusual or extreme case. It is useful because it describes a pattern that is recognizable in the private real estate fund market: an affiliate compensation arrangement that was economically significant, operationally integrated into the fund’s acquisition process, and known throughout the organization, but that never received the specific disclosure treatment that its significance required. The DDQ process, both the sponsor’s internal one and the responses to investor-generated questionnaires, was part of how that omission was maintained rather than corrected.
A DDQ process that functions as a genuine disclosure control rather than an administrative intake exercise would have surfaced the affiliate brokerage arrangement at the stage where it could have been disclosed accurately and specifically, before investors committed $500 million based on materials that omitted the information. The process change required to produce that outcome was not complicated: ask specifically about every compensation arrangement involving any affiliated entity, compare the answer against what the PPM discloses, and resolve the discrepancy before the offering documents reach investors.
The sponsors who build that process into their offering preparation, who treat DDQ responses with the same legal seriousness as PPM disclosures, and who maintain the documentation record that demonstrates the process was genuinely followed, are the sponsors who will have a defensible answer when an investor, a regulator, or a court asks whether the offering materials provided a complete and accurate picture of the compensation arrangements and conflicts that affected the fund’s management.