How to Structure Offshore Funds for Real Estate

Real estate is one of the most forgiving asset classes when you get the structure right—and one of the most punishing when you don’t. The difference between a clean, tax-efficient offshore fund and a leaky one is often measured in after-fee IRR. I’ve spent years helping sponsors, family offices, and institutional investors set up and refine offshore structures, and the patterns are consistent: pick the right jurisdiction, align your structure with investor tax profiles, be ruthless about substance and compliance, and keep your economics simple and auditable. This guide walks through how to do that in practice.

Why Use an Offshore Fund for Real Estate

Offshore funds aren’t about secrecy; they’re about neutrality and execution. In real estate, a well-structured offshore vehicle can:

Pool global capital efficiently without favoring one tax system over another.

Manage exposure to ECI, FIRPTA, UBTI, VAT, and other tax frictions.

Offer regulatory clarity when marketing across multiple countries.

Reduce treaty shopping risk with robust substance and governance.

For many managers, offshore is the only practical way to assemble a diverse investor base—US taxable, US tax-exempt, European insurers, Asian family offices—into the same strategy without eroding returns.

Clarify Your Investor Base and Tax Drivers

Before you pick a domicile or draw boxes on a chart, map your investors and target assets. Most real estate fund decisions flow from five questions:

Where are your investors based?

US taxable, US tax-exempt (foundations, endowments), non-US taxable, non-US tax-exempt, sovereign wealth, pensions.

What assets and geographies will you own?

US direct property, European operating RE, UK development, Asia logistics, data centers, credit strategies.

What is the holding period and leverage profile?

Core/core-plus (low leverage, longer hold) vs. value-add/opportunistic (higher leverage, development).

How will you finance assets?

Asset-level mortgages, fund-level subscription or NAV lines, mezzanine tranches.

What level of investor reporting and regulation do you need?

AIFMD passporting, SFDR, US ERISA sensitivity, Sharia-compliance, ESG frameworks (GRESB).

The most common tax drivers you’re solving for:

US ECI and FIRPTA exposure for non-US investors in US real estate.

UBTI for US tax-exempt investors when using leverage.

Withholding tax and interest limitation rules in holding jurisdictions (ATAD in the EU).

CFC/PFIC and hybrid mismatch rules that affect investor-level outcomes.

VAT leakage on fees and management services.

Choosing the Right Jurisdiction

There isn’t one “best” domicile. You match the jurisdiction to your investor base, marketing plan, and asset mix.

Cayman Islands

Best for: Global investor pools, master-feeder structures with US and non-US investors; US real estate with non-US/US TE investors.

Vehicles: Exempted Limited Partnership (ELP) for the fund; LLC/Exempted Company for GP/manager.

Strengths: Familiarity (especially with US counsel), speed to market, flexible partnership law, competitive cost, developed service ecosystem.

Watch-outs: Economic substance and AML/FATCA/CRS compliance must be tightly managed; EU retail distribution not feasible.

Practical insight: Cayman domiciles the vast majority of offshore hedge funds and a huge share of private funds. For closed-end real estate funds, Cayman ELPs remain standard for global capital with US tax complexity.

Luxembourg

Best for: European distribution under AIFMD, investors requiring EU oversight, holding EU real estate.

Vehicles: SCSp (limited partnership), RAIF/SIF/SICAV umbrella structures; Sàrl holdcos.

Strengths: AIFMD passport (via AIFM), wide treaty network, investor comfort, SFDR integration, strong RE holdco capabilities.

Watch-outs: Cost and timeline higher; substance and governance expectations are non-negotiable; ATAD interest limitation rules.

Practical insight: For pan-European real estate with institutional investors, a Lux SCSp RAIF with Lux Sàrl holdcos is the default.

Jersey and Guernsey

Best for: UK/European-adjacent structures without full EU regulation; conservative institutions (UK pensions, Channel Islands familiarity).

Vehicles: Jersey Private Fund (JPF), Expert Funds; Guernsey Private Investment Funds (PIFs).

Strengths: Speed, regulatory pragmatism, strong administrators, common law.

Watch-outs: EU marketing via NPPR only (no AIFMD passport); still need substance and governance.

Singapore (VCC) and Hong Kong (LPF)

Best for: Asia-focused strategies, sovereign wealth and family offices in APAC, regional asset platforms.

Vehicles: Singapore VCC, LP; Hong Kong LPF, OFC.

Strengths: Growing treaty networks, strong rule of law, favorable tax regimes, ability to build onsite teams for substance.

Watch-outs: Regional tax law complexity (e.g., India/China); regulators expect real activity.

Delaware and Onshore Feeders

Delaware LP/LLC is standard for US feeder or parallel funds, often paired with Cayman or Lux vehicles.

For US marketing, 3(c)(1) or 3(c)(7) exemptions under the Investment Company Act are critical; the Investment Advisers Act applies to the manager.

Mauritius and BVI

Mauritius: Useful for certain Africa/India strategies (case-by-case), though treaty benefits have tightened.

BVI: Quick and cost-effective for SPVs; funds increasingly favor Cayman/Jersey/Lux for institutional acceptance.

Rule of thumb:

US-heavy assets with global investors: Cayman master + Delaware feeder + blockers/REIT.

EU-heavy assets: Luxembourg fund + Lux holdcos + local PropCos.

Asia-heavy assets: Singapore VCC or Hong Kong LPF + local holdcos.

Core Structures, Simply Explained

Master-Feeder

Components: One master fund (Cayman or Lux), two feeders (Delaware for US taxable; Cayman for non-US and US tax-exempt), and parallel SPVs for blockers.

Why use it: Pools capital for a single portfolio while solving investor-level tax differences.

Use case: US and non-US investors targeting US real estate.

Parallel Funds

Components: Two or more funds run side by side (e.g., US LP and Lux SCSp) investing pro-rata.

Why use it: Regulatory or tax reasons prevent pooling capital (e.g., AIFMD vs. US ERISA).

Use case: European institutions require EU structure, US taxable prefer Delaware.

Aggregators and Blockers

Aggregator: Entity that collects a subset of investors to invest as one—frequently to manage tax status or voting.

Blocker: Corporation placed above ECI-generating assets to convert flow-through income into dividend income for certain investors (e.g., US tax-exempt or non-US investors).

Use case: Blockers for US investments to manage ECI/FIRPTA and UBTI.

REIT Feeders or Platforms

Domestic REITs can sit above US properties. If “domestically controlled,” non-US investors can sell REIT shares without FIRPTA on exit.

Use case: Stabilized assets, core/core-plus strategies; large institutional funds with predictable distributions.

SPV Chain: Holdco and PropCo

Typical: Fund -> Holdco (Lux/Singapore/Jersey) -> Local PropCo (e.g., Germany GmbH, UK Ltd).

Why use it: Liability segregation, financing at asset level, treaty access, exit flexibility.

Building the Entity Stack

Here’s a typical US-focused, global investor layout described in words:

US taxable investors commit to a Delaware LP feeder.

Non-US and US tax-exempt investors commit to a Cayman ELP feeder.

Both feeders invest into a Cayman master fund.

The master invests into US corporate blockers (C-corps) or a REIT that holds underlying US PropCos/LLCs.

Manager sits in the US or UK with appropriate registrations; a Cayman/Delaware GP entity controls the fund.

For a European-focused fund:

Investors commit to a Luxembourg SCSp RAIF managed by an EU AIFM (could be third-party).

The fund invests via Lux Sàrl holdcos into local PropCos in each country.

Financing arranged at PropCo or Holdco level; ATAD compliance modeled upfront.

Tax Architecture: Getting It Right

I’ll keep this practical. Ask two questions: where is the income taxed, and what flows through to investors?

US Real Estate with Non-US and US Tax-Exempt Investors

Key issues:

ECI (effectively connected income): Direct US real estate generally triggers ECI for non-US investors.

FIRPTA: Gains from US real property interests are taxed for non-US investors unless structured via exceptions.

UBTI: US tax-exempt investors incur UBTI on debt-financed real estate.

Solutions frequently used:

US Blocker Corporations: The fund invests through a US C-corp; non-US and US tax-exempt investors receive dividends (subject to withholding), avoiding ECI/UBTI.

REITs: Many large platforms use REITs to benefit from dividends and potential “domestically controlled” status on exit.

Leveraged Blockers: Interest deductions at blocker level can reduce corporate tax, but 163(j) limitations apply (generally 30% of ATI, subject to change). Thin cap rules and transfer pricing matter.

Tactics:

Domestically controlled REIT strategy: Ensure >50% of REIT shares are held by US persons for 5 years, allowing non-US investors to exit without FIRPTA on share sales.

Portfolio interest exemption: For debt instruments, structure to qualify for portfolio interest (no >10% voting stake, proper documentation).

Common mistake:

Holding US real estate in a US partnership directly above the fund without blockers. Non-US investors receive ECI and must file US returns. Expect investor pushback and delays.

European Real Estate with Global Investors

Key issues:

ATAD interest limitation (30% EBITDA, country-specific nuances).

Withholding tax on dividends/interest, treaty access, hybrid mismatch rules.

Real estate transfer taxes (RETT) upon asset or share transfers; share deal planning matters.

VAT on management and development services; recoverability varies by jurisdiction.

Solutions:

Lux SCSp RAIF with Lux Sàrl holdcos: Combine partnership tax transparency with a treaty-friendly holding company.

Substance: Onsite directors, local employees (or secondments), office lease, local decision-making minutes. Substance is essential to withstand treaty challenges and anti-abuse rules.

Financing: Use third-party debt at PropCo where possible; intercompany loans from holdcos aligned to market terms and ATAD.

Practical note:

In Germany and France, share deal planning can significantly reduce transfer taxes—but regulators have tightened anti-avoidance. Model both asset and share exit routes.

Asia-Pacific Real Estate

Singapore VCC fund + Singapore holdcos into regional PropCos is gaining traction.

Pay attention to local source rules (e.g., Australia’s MIT regime, India’s GAAR/POEM, China’s indirect transfer rules).

Currency controls and capital repatriation (e.g., China SAFE rules) impact exit timing—build longer cash buffers.

US Taxable Investors and PFIC/CFC Issues

Many offshore blockers can be PFICs to US taxable investors, creating punitive tax treatment.

Solutions: Use onshore parallel vehicles for US taxable LPs; avoid passive foreign corporations for US persons where possible.

Check-the-box elections: Elect to treat eligible foreign entities as disregarded for US tax to manage inclusions and simplify reporting.

ERISA and Plan Asset Concerns

If 25% or more of any class of equity is held by “benefit plan investors,” plan asset rules apply, dragging fiduciary duties onto the manager.

Solutions: Benefit plan carve-outs and limits in fund docs; VCOC/REOC strategies to avoid plan asset status.

Regulation and Marketing

US: Rely on 3(c)(1) (100 investor limit) or 3(c)(7) (qualified purchasers) exemptions; comply with the Advisers Act (registration or exemption). CFTC rules can apply to commodity interest strategies (rare in pure real estate).

EU: AIFMD requires an authorized AIFM for passporting; otherwise use national private placement regimes (NPPR). Many managers use third-party AIFMs to speed up launches.

UK: UK AIFMD-equivalent NPPR; FCA financial promotion rules if marketing to UK retail restricted investors.

FATCA/CRS: Collect GIIN, implement investor due diligence, regularly report. Non-compliance can block capital flows.

SFDR: If EU distribution is planned, define product classification (Article 6, 8, or 9) and prepare disclosures; ESG data for real estate is tractable but needs upfront systems.

Practical insight:

The marketing plan often dictates the domicile more than tax. If you need EU pensions, Luxembourg with an AIFM is typically non-negotiable.

Fund Economics: Fees, Carry, and Waterfalls

Keep your economics transparent and LP-aligned. Sophisticated LPs will read the fine print.

Management Fee: 1.5%–2% on commitments during the investment period, stepping down to invested capital or NAV thereafter.

Preferred Return (Hurdle): 7%–9% is common in value-add/opportunistic RE funds, net of fees and expenses.

Carried Interest: 20%–25%, with a European waterfall (whole fund) favored by institutions; American waterfall (deal-by-deal) requires robust clawback and escrow.

GP Commitment: 1%–3% of commitments (can be financed but expect disclosure).

Catch-up Mechanics: Define clearly; avoid ambiguities in waterfall tiers.

Recycling: Allow reinvestment of proceeds from early dispositions up to a cap; specify timing and leverage implications.

Fee Offsets: 100% offset of transaction/monitoring fees to management fees is now standard.

Expense Caps: Budget third-party expenses realistically; admin, audit, tax, directors, SPV costs add up fast in multi-jurisdiction setups.

Common mistake:

Overly complex waterfalls or bespoke side letter economics. Complexity breeds errors and disputes. Keep a single, auditable model controlling all distributions.

Financing the Fund and Assets

Subscription Lines: Efficient for early deal execution and smoothing capital calls; target 20%–30% of commitments with 12–18 months maturity. Respect ILPA guidance—don’t use lines to engineer IRR optics without disclosure.

NAV Facilities: Useful in mid-to-late fund life to fund capex or bridge dispos; negotiate covenants aligned to real estate cycles.

Asset-Level Debt: Match tenor to business plan; include hedging for floating rates; ensure LPA leverage caps cover combined fund and asset-level exposure.

Intercompany Loans: Keep arm’s-length terms; document transfer pricing; track ATAD and thin cap.

Pro tip:

Build a monthly cash forecast at fund and SPV levels. Real estate cash flows are lumpy; liquidity surprises kill credibility.

Step-by-Step: Standing Up an Offshore Real Estate Fund

Define Strategy and Investor Map

Geography, asset types, leverage, ESG posture, target investors by region and type.

Pick Domicile and Structure

US-heavy assets with global LPs: Cayman master-feeder with US blockers or a REIT.

EU-heavy assets: Luxembourg SCSp RAIF with Lux Sàrl holdcos.

Include parallel funds if needed for US taxable investors.

Assemble Your Team

Legal counsel (onshore and offshore), tax advisors in each jurisdiction, fund admin, auditors, AIFM (if EU), depositary-lite (if required), directors, and valuation agent.

Draft Core Documents

LPA, PPM, subscription docs, side letter templates, advisory committee terms, valuation policy, ESG policy (if applicable), AML/KYC and privacy notices.

Establish Entities and Governance

Form fund, GP, manager, holdcos, and SPVs. Appoint directors with relevant experience. Configure signatories and decision matrices.

Build Substance

Office lease (where required), local directors, board calendars, onshore/offshore delineation for investment decisions. Minutes matter.

Model Tax and Financing

Full tax models per jurisdiction; ATAD/163(j)/withholding sensitivity; leverage stacks; blocker/REIT modeling; exit routes (asset vs share).

Service Provider Integrations

Admin onboarding, bank accounts, AML/KYC pipelines, FATCA/CRS registrations, depositary-lite (where applicable), AIFM reporting.

Fundraising and Marketing Compliance

Verify SEC/AIFMD exemptions; prepare DDQ, data room, ESG disclosures, fee/expense model; set up NPPR filings per EU market.

First Close and Capital Calls

Use subscription lines judiciously; circulate capital call notices with clear use of proceeds; confirm FX hedging if multi-currency.

Acquisition SPV Chain

Form holdcos/PropCos in deal timeline; align intercompany agreements; ensure lender consent and security package.

Ongoing Operations

Quarterly NAV and investor reports; tax filings; K-1s or equivalent; regulatory reports (AIFMD Annex IV, FATCA/CRS); audit.

Exits and Distributions

Prepare tax-efficient exit (share vs asset sale); manage escrow and indemnities; waterfall calculations reviewed by admin and counsel.

Wind-Down

Liquidation plans for SPVs and holdcos; tax clearance; capital return schedule; archival and investor confirmations.

Real-World Structures: Three Examples

1) US Value-Add with Global LPs

Structure: Delaware 3(c)(7) feeder for US taxable; Cayman ELP feeder for non-US and US TE; Cayman master; US C-corp blockers for each asset; manager in New York; Cayman GP.

Why: Avoid ECI for non-US; block UBTI for US TE; protect US taxable investors from PFIC by using the Delaware feeder.

Twist: For stabilized assets, migrate selected assets into a domestically controlled REIT to optimize exit.

Outcome I’ve seen: Cleaner investor onboarding, reduced US tax filings for non-US LPs, and better exit optionality via share sales.

2) Pan-European Core-Plus

Structure: Lux SCSp RAIF, managed by a third-party EU AIFM; Lux Sàrl holdcos; local PropCos in France, Germany, Spain; asset-level debt.

Why: AIFMD passport for EU fundraising; treaty network; investor comfort; ATAD-compliant financing.

Twist: Article 8 SFDR classification with measurable energy improvement KPIs; GRESB reporting baked into asset management.

Outcome: Broader EU distribution, consistent tax outcomes, and smoother lender negotiations thanks to Lux platform credibility.

3) Asia Logistics Platform

Structure: Singapore VCC master; parallel HK LPF for North Asia investors; Singapore holdco; PropCos in Vietnam, Thailand, and Australia; local JV partners for development.

Why: Regional familiarity, treaty access, and growing LP comfort with VCC; substance supported by Singapore team.

Twist: Use of AUD and SGD hedges, plus a NAV facility once the seed portfolio stabilizes.

Outcome: Faster closings with regional banks and smoother capital mobility than trying to route everything through a non-APAC domicile.

Common Mistakes—and How to Avoid Them

Underestimating substance: Paper boards get challenged. Put real people and decisions in your domicile. Keep board calendars and documented approvals.

Mixing investor types without feeders: US taxable, US tax-exempt, and non-US often need different paths to the same asset to avoid tax friction.

Ignoring local taxes and transfer mechanics: In Europe, share vs asset sales can swing returns; model early and include in IC memos.

Overlooking interest limitation rules: ATAD and 163(j) eat into the blocker advantage. Don’t assume pre-2018 leverage playbooks still work.

Sloppy expense allocation: LPs scrutinize who pays for what. Codify in the LPA and follow it. Admins should review each expense line.

Overreliance on subscription lines: IRR engineering is obvious to sophisticated LPs. Use lines as tools, not crutches, and disclose the impact.

Weak waterfall implementation: One mis-coded tier can misallocate carry. Use a single master model, test scenarios, and have admin validate before each distribution.

Late regulatory filings: Annex IV, FATCA/CRS, local corporate filings—misses damage trust and can trigger fines.

No exit plan: Decide early if you aim for share deals or asset deals; the holding company design is different.

Governance That LPs Trust

Advisory Committee: Conflict reviews, valuation challenges, key-man waivers, related-party matters. Keep minutes and timely packages.

Key-Man Clause: Define exact individuals and triggers; specify suspension mechanics and investor remedies.

Removal Rights: For cause and, increasingly, without cause (with super-majority) in institutional funds.

Valuation Policy: Real estate valuation should be policy-driven, with independent valuers for significant assets; ensure consistency with GAAP/IFRS and lender covenants.

ESG and Health & Safety: Real estate has physical risks—cyber for smart buildings, environmental, and safety. Document your controls.

Costs and Timelines

Rough order-of-magnitude ranges for a first-time, institutional-grade setup (varies widely by scope and counsel):

Legal (fund + feeders + SPVs): $300k–$800k across jurisdictions.

Admin and Depositary-lite (annual): $150k–$400k depending on complexity.

Audit and Tax (annual): $100k–$300k, higher with US K-1s and multiple countries.

Directors and Registered Office: $25k–$100k.

AIFM (if third-party): 10–20 bps of commitments or a blended fee.

Timeline:

Cayman/Delaware master-feeder: 8–12 weeks to first close if documents are ready.

Luxembourg with AIFM: 12–20 weeks; add time for bank account opening and depositary-lite.

Time savers from experience:

Get administrator and bank onboarding started in parallel with document drafting.

Lock valuation and expense policies early to avoid last-minute LP comments.

Prepare model side letter language for common investor asks (MFN, reporting, ESG, ERISA representations).

ESG, Reporting, and Data

SFDR: If marketing in the EU, decide early whether you’re Article 6, 8, or 9; ESG claims must match asset-level data collection.

GRESB: Many institutions now expect participation or equivalent metrics for environmental performance.

Building Performance: Energy, carbon, water—your asset plan should target measurable improvements (e.g., 20% energy intensity reduction over 3 years).

Data Room Discipline: Provide a clear DDQ, case studies, sample reporting pack, valuation approach, and fee/expense model. Transparency accelerates allocations.

Risk Management: The Quiet Alpha

FX: If assets and LP base are in different currencies, hedge distributions and major capex; explain policy in the PPM.

Insurance: Tailor P&C, builder’s risk, environmental, and cyber coverage; check lender requirements.

Operational Resilience: Backup signatories, dual approvals, incident response for cyber threats at proptech-heavy buildings.

Conflicts: Related-party construction, brokerage, or asset management? Pre-clear with the advisory committee and give LPs right to opt out or receive fee offsets.

Practical Tips from the Field

Term sheets for co-investments: Lock basic terms early (fees, governance, exit rights). Avoid serial one-off negotiations per deal.

Tie your carry to audited numbers: It slows carry draw slightly but prevents clawback pain later.

Use SPV naming conventions and a live structure chart: When the 15th SPV is formed, clarity prevents costly mistakes.

Build a tax calendar before first close: List every filing across all jurisdictions with responsible owners. No surprises.

Don’t forget VAT: Management and development services can attract VAT. Map recoverability country by country.

Quick FAQ

Can I use one vehicle for everyone? Usually not. US taxable, US tax-exempt, and non-US investors often need feeders or parallel funds to optimize tax.

Are blockers always needed for US assets? If you have non-US or US tax-exempt investors, typically yes—unless you use a REIT or structure around exceptions.

Is Luxembourg always better for Europe? Often, but Jersey/Guernsey can be faster and cheaper if you’re not broad EU marketing. Evaluate based on investor demands.

How much substance do I need? Enough to reflect genuine decision-making and operations: local directors, meetings, records, and sometimes staff. Substance is now a must-have, not a nice-to-have.

How big should my GP commit be? 1%–3% is conventional; smaller managers sometimes finance it, but disclose the terms.

Final Thoughts

A well-structured offshore real estate fund doesn’t rely on heroics; it relies on discipline. Get the investor map right, choose a domicile that matches your marketing and tax needs, build real substance, and keep your economics and reporting clean. Most of the value isn’t in an exotic structure—it’s in avoiding friction: tax leakage, compliance misses, cash crunches, and waterfall errors. Do the basics exceptionally well, and your offshore platform will feel boring in the best way: predictable, scalable, and LP-friendly.

If you’re deciding between two plausible structures, pick the one you can explain to a skeptical LP in five minutes, backed by a one-page flow chart and a tested model. That clarity, more than anything, is what wins allocations and protects returns.