A closed-end real estate fund is an investment vehicle with a finite life (call it anywhere from 5 to 12 years, plus extension options). These types of funds have a specific timeframe for raising capital, investing, harvesting the investments they have made, and then distributing proceeds to investors. This is in contrast to an open-ended fund, also known as an "evergreen" fund, which has an infinite life and can accept investments throughout its lifespan.

As a result of these differences, closed-end funds are often used for opportunistic or value-add opportunities where the defined strategy is to buy, fix/develop, and then sell, whereas open-ended funds are often used for core opportunities, where the assets are intended to be held indefinitely for income. Neither fund structure is inherently good or bad; each has its benefits and drawbacks.

However, the perceived weighting of these benefits and drawbacks shifts during market cycles. Since global real estate markets started to turn downward in 2022, the ability to be patient and think long-term has become a key ingredient for survival. You may have done everything you said you would do perfectly, but the market may not be there to grant you the liquidity you had originally planned for.

Now the question becomes: How patient can and should we be?

In my opinion, the greatest opportunities exist for (1) the larger firms that have a strong balance sheet and defensible income-producing properties and (2) the smaller, nimble firms that can capitalize on the dislocation in the market (and aren't overly burdened with legacy assets that are sucking up resources and capacity).

This perspective is true of other sectors as well. This weekend, venture capitalist Chris Dixon of a16z wrote a post titled, "The long game for crypto." In it, he alludes to the current market downturn (ETH is down nearly 60% from its all-time high) and says that "we play the long game at a16z and a16z crypto: Our funds are structured with 10+ year horizons because building new industries takes time."

The fact that he wrote this post says a lot, I think, about the psyche of investors today. The perceived weighting has changed, and people are now investing and building more for the future. As the late Charlie Munger once said, "The big money is not in the buying and the selling, but in the waiting."

Cover photo by KAi'S PHOTOGRAPHY on Unsplash

Cambridge, Massachusetts, requires that 20% of the new space in larger housing developments include affordable homes. This, as we have talked about many times before on this blog, is known as inclusionary zoning (IZ). According to the Pioneer Institute, there are more than 141 communities in the state that have some sort of IZ policy.

But now, what is happening is that the numbers don't work on new housing projects. In the 30 years since the ordinance was enacted, it is reported that it helped create 1,603 affordable homes. However, since 2017 — the year the city increased the affordable requirement to 20% — only 200 new affordable homes have been created. That's approximately 20-22 new affordable homes per year — not much.

These numbers also don't speak to the number of new housing projects that could have been built, but weren't feasible precisely because of the IZ policy. This is the greater risk, because even new "luxury" projects help to relieve housing pressures within a market.

It is for this reason, along with others, I'm sure, that a developer is now suing the City of Cambridge, arguing that inclusionary zoning is unconstitutional on the grounds that it infringes upon people's property rights. To quote the developer, "I [would] have to build at a loss. Eventually, you just throw your hands up and say it doesn't work."

If successful, this case could help to change how cities tax new housing and how they aim to create new affordable housing, though I should mention that there have already been prior rulings on this issue.

Customarily, the way municipalities try to offset the burden of inclusionary zoning is to allow additional density and/or waive certain development levies. However, to accomplish this, you ideally need a planning framework where it's perfectly clear what maximum density would have been permitted without IZ.

For example, if 100,000 square feet is the maximum permitted density without IZ, and an additional 20% is permitted with IZ (+20,000 square feet) you can now calculate whether this additional density is enough to perfectly offset the IZ tax. If it is not, well then, you could maybe have a situation where it's deemed as an unconstitutional "taking" of private land (oh boy, please don't take this as any sort of planning legal advice).

I think most of us would agree that cities are better when they are diverse and attainable to more people. The problem with IZ policies is that they run the risk of selectively taxing only certain people in an effort to create this outcome.

Cover photo by Brett Wharton on Unsplash

A closed-end real estate fund is an investment vehicle with a finite life (call it anywhere from 5 to 12 years, plus extension options). These types of funds have a specific timeframe for raising capital, investing, harvesting the investments they have made, and then distributing proceeds to investors. This is in contrast to an open-ended fund, also known as an "evergreen" fund, which has an infinite life and can accept investments throughout its lifespan.

As a result of these differences, closed-end funds are often used for opportunistic or value-add opportunities where the defined strategy is to buy, fix/develop, and then sell, whereas open-ended funds are often used for core opportunities, where the assets are intended to be held indefinitely for income. Neither fund structure is inherently good or bad; each has its benefits and drawbacks.

However, the perceived weighting of these benefits and drawbacks shifts during market cycles. Since global real estate markets started to turn downward in 2022, the ability to be patient and think long-term has become a key ingredient for survival. You may have done everything you said you would do perfectly, but the market may not be there to grant you the liquidity you had originally planned for.

Now the question becomes: How patient can and should we be?

In my opinion, the greatest opportunities exist for (1) the larger firms that have a strong balance sheet and defensible income-producing properties and (2) the smaller, nimble firms that can capitalize on the dislocation in the market (and aren't overly burdened with legacy assets that are sucking up resources and capacity).

This perspective is true of other sectors as well. This weekend, venture capitalist Chris Dixon of a16z wrote a post titled, "The long game for crypto." In it, he alludes to the current market downturn (ETH is down nearly 60% from its all-time high) and says that "we play the long game at a16z and a16z crypto: Our funds are structured with 10+ year horizons because building new industries takes time."

The fact that he wrote this post says a lot, I think, about the psyche of investors today. The perceived weighting has changed, and people are now investing and building more for the future. As the late Charlie Munger once said, "The big money is not in the buying and the selling, but in the waiting."

Cover photo by KAi'S PHOTOGRAPHY on Unsplash

Cambridge, Massachusetts, requires that 20% of the new space in larger housing developments include affordable homes. This, as we have talked about many times before on this blog, is known as inclusionary zoning (IZ). According to the Pioneer Institute, there are more than 141 communities in the state that have some sort of IZ policy.

But now, what is happening is that the numbers don't work on new housing projects. In the 30 years since the ordinance was enacted, it is reported that it helped create 1,603 affordable homes. However, since 2017 — the year the city increased the affordable requirement to 20% — only 200 new affordable homes have been created. That's approximately 20-22 new affordable homes per year — not much.

These numbers also don't speak to the number of new housing projects that could have been built, but weren't feasible precisely because of the IZ policy. This is the greater risk, because even new "luxury" projects help to relieve housing pressures within a market.

It is for this reason, along with others, I'm sure, that a developer is now suing the City of Cambridge, arguing that inclusionary zoning is unconstitutional on the grounds that it infringes upon people's property rights. To quote the developer, "I [would] have to build at a loss. Eventually, you just throw your hands up and say it doesn't work."

If successful, this case could help to change how cities tax new housing and how they aim to create new affordable housing, though I should mention that there have already been prior rulings on this issue.

Customarily, the way municipalities try to offset the burden of inclusionary zoning is to allow additional density and/or waive certain development levies. However, to accomplish this, you ideally need a planning framework where it's perfectly clear what maximum density would have been permitted without IZ.

For example, if 100,000 square feet is the maximum permitted density without IZ, and an additional 20% is permitted with IZ (+20,000 square feet) you can now calculate whether this additional density is enough to perfectly offset the IZ tax. If it is not, well then, you could maybe have a situation where it's deemed as an unconstitutional "taking" of private land (oh boy, please don't take this as any sort of planning legal advice).

I think most of us would agree that cities are better when they are diverse and attainable to more people. The problem with IZ policies is that they run the risk of selectively taxing only certain people in an effort to create this outcome.

Cover photo by Brett Wharton on Unsplash