Woodfine Management Corp. has introduced a disruptive alternative real estate investment structure, the Woodfine Limited Partnership, that realigns the interests of private equity investors and managers much as Vanguard did for mutual funds.
The Woodfine LPs overhaul the traditional fee structure so that managers’ compensation takes two forms. The first is unit-based compensation. By taking ownership of the asset rather than the profit, managers become stewards of the asset instead of merely profit seeking. The second is contribution to overhead. For managing the partnership, managers receive a flat fee that is not tied to the net asset value and that serves to cover expenses rather than acting as a revenue stream.
Taking LP units as profit realigns the LP/GP relationship in that overcharging of fees is against managers’ own interests. As a result of this restructuring of the capital deck, limited partners benefit from almost the entire gross internal rate of return.
The Woodfine LPs also forego traditional bank financing for their real estate debt in favor of a narrow-bank financing model in which the equity is invested by the limited partners and the debt is self-issued by the partnerships, with strict criteria for qualified investments. Clear borrowing restrictions maintain investment-grade ratings.
This ability to issue debt with the purpose of reinvesting in future construction distinguishes Woodfine’s product from conventional real estate offerings. The model allows repetition of the qualified investments at each of the development sites, creating perpetual equity.