Converting a Closed-End Real Estate Fund to an Evergreen NAV (Open-End) Structure, Part 3: Capital Formation

Capital formation is the engine that allows an evergreen or open-end fund to function.

If you read Part 1 and Part 2 of this series, you know that (a) converting a closed‑end fund to an evergreen fund can have significant benefits for sponsors and investors, and (b) any such conversion must include a long‑term capital formation plan.

Fortunately, evergreen funds are powerful capital formation vehicles, particularly in the private wealth channel.  Over the past several years, evergreen and semi‑liquid private market vehicles distributed through financial advisors and wealth platforms have grown into a market representing hundreds of billions of dollars of capital.  Industry research indicates that semi‑liquid private market funds are now approaching $500 billion in assets, with assets growing by more than 30% over the twelve months through September 2025.[1], [2]

Private wealth investors represent one of the largest untapped pools of capital for private markets, with trillions of dollars expected to move into alternative investments over the coming years.  Financial advisors and high‑net‑worth investors are increasingly allocating to semi‑liquid private real estate vehicles, creating a deep and growing pool of capital for sponsors that can access these distribution channels.  These allocations are often driven by investor demand for long-term exposure to private assets, NAV-based pricing that is less sensitive to short-term market volatility and portfolio diversification beyond publicly traded stocks and bonds.

Evergreen vehicles are designed to accept new capital on an ongoing basis.  That capital can support portfolio growth while also providing liquidity to investors through a structured redemption program.  For many financial advisors and high-net-worth investors seeking stable, long-term allocations to real estate, an evergreen NAV-based vehicle fits naturally within that framework.  Investors subscribe based on NAV and the portfolio grows over time within a structure designed to accommodate periodic liquidity.

For that reason, many evergreen real estate vehicles are designed with the private wealth channel in mind.

In practice, accessing the private wealth channel typically requires relationships with broker-dealers, registered investment advisers and other wealth platforms that distribute private market investments to their clients.  Sponsors seeking to raise capital through these channels often work with placement agents, dealer managers or internal distribution teams that build and maintain relationships with financial advisors and wealth platforms.  Once established, these distribution networks can provide a steady flow of capital into evergreen vehicles over time.  Structuring an evergreen vehicle to access these distribution channels typically requires multiple share classes and carefully designed distribution arrangements, which will be discussed in the next post in this series.

In addition to traditional distribution channels, some sponsors have successfully raised capital through issuer-direct strategies, particularly in private offerings conducted under Rule 506(c).  Digital platforms and online investor outreach have made it easier for sponsors to connect directly with accredited investors without relying on a captive broker-dealer network.  While this approach typically requires a different investor acquisition strategy, it can be particularly useful for smaller asset managers seeking to build an initial capital base before expanding into broader distribution channels.

The UPREIT Structure

Structurally, many evergreen real estate vehicles are organized using a REIT and operating partnership structure, commonly referred to as an UPREIT. This structure provides significant flexibility and allows the vehicle to accommodate multiple sources of capital within a single investment program.

In an UPREIT evergreen structure, capital can be raised from a variety of investor channels, including retail and private wealth investors, institutional investors, offshore investors, property contributors through Section 721 exchanges, and co‑investment partners.  The structure allows these different forms of capital to coexist while maintaining a unified portfolio and centralized asset management and governance.

The structure below illustrates how capital from multiple investor channels can be introduced into a single evergreen vehicle.

The REIT in the Structure

The UPREIT structure shown above, used by many evergreen real estate vehicles, has the REIT at the top of the structure.  This approach is particularly common in vehicles designed for distribution through financial advisors and private wealth platforms.

One important reason is tax reporting. Investors in a REIT receive Form 1099 tax reporting, while investors in partnerships generally receive Schedule K-1s.  Retail investors and many private wealth investors strongly prefer the simplicity of 1099 reporting, which many financial advisors view as easier for clients to understand and administer.  For that reason, placing a REIT at the top of the structure can make an evergreen vehicle significantly easier to distribute through retail and private wealth channels.

However, a REIT is not required for an evergreen structure.

Some sponsors begin with a partnership-based vehicle and later add a REIT once the fund begins raising capital through retail or wealth channels.  For our clients, we draft the governing documents from the outset to allow a REIT to be inserted above the partnership at a later stage if the sponsor decides to pursue that strategy.  This “springing REIT” concept allows a sponsor to launch an evergreen vehicle without immediately committing to a REIT structure while preserving the ability to add one later if the capital formation strategy evolves toward the private wealth channel.

Institutional open-end real estate funds often use a different structural approach. Many institutional vehicles, including funds in the ODCE (Open-End Diversified Core Equity) category, are organized with a partnership at the top of the structure rather than a REIT. In these structures, investors typically invest directly into a partnership vehicle, which in turn owns a REIT subsidiary that holds the underlying property entities within the portfolio. This arrangement allows investors to retain partnership tax treatment and receive pass-through tax attributes, including depreciation and other deductions, while the REIT sits below the partnership for structural and regulatory purposes without altering the investors’ tax treatment.

Sponsors designing evergreen vehicles therefore have several structural options depending on their target investor base and capital formation strategy.  The advantages and disadvantages of incorporating a REIT into the structure will be discussed in more detail in a later post in this series.

The Operating Partnership Level: Structural Flexibility

The operating partnership level of the structure provides additional flexibility.

For example, the sponsor can typically receive its performance allocation at the operating partnership level in a tax-efficient manner, which is one reason many sponsors prefer the UPREIT structure.

The operating partnership also allows the vehicle to accept property contributions through transactions structured under Section 721 of the Internal Revenue Code. In these transactions, property owners contribute real estate to the operating partnership in exchange for operating partnership units, generally on a tax-deferred basis.  These transactions can be particularly attractive to real estate owners with appreciated property who are seeking diversification while deferring taxes.

DST Capital

The operating partnership structure has also become increasingly important in connection with Delaware Statutory Trust (DST) programs used in Section 1031 exchanges.  The DST market has grown significantly in recent years, with billions of dollars of equity raised annually through DST offerings.[3]

These programs are particularly popular with real estate owners seeking to complete tax-deferred exchanges while transitioning from direct property ownership to passive investment structures.

In practice, DST programs now operate under several different models.

In the most traditional model, the DST investment simply holds the underlying property for a fixed period, often approximately ten years, and then sells the property.  Investors must then complete another exchange or recognize taxable gain.  As a result, the DST market creates a recurring pool of capital seeking long-term real estate exposure.

In more recent structures, the DST sponsor may retain the ability to contribute the property to an operating partnership in exchange for operating partnership units.  In these structures, the operating partnership of a NAV REIT may have the option to acquire the DST property through a Section 721 transaction, allowing investors to transition from a single-property DST investment into a diversified portfolio of assets.

These structures have become increasingly popular because they offer DST investors a potential path out of the traditional cycle of repeated exchanges, while providing sponsors with access to a large pool of capital seeking long-term exposure to real estate.  For sponsors, this creates another important capital formation channel, allowing evergreen vehicles to absorb capital that would otherwise continue cycling through the 1031 exchange market.

Institutional Capital and Co-Investment

Institutional investors can also participate in evergreen structures.

In many cases, institutional investors invest directly at the REIT level or through the operating partnership alongside other investors.  The structure can also accommodate co-investment arrangements at the asset level, where institutional partners invest alongside the fund in particular properties.

In this way, a single evergreen structure can accommodate multiple types of capital while maintaining a unified portfolio of assets.

Share Classes and Distribution

In practice, accessing these different sources of capital often requires different share classes, distribution arrangements and offering structures.

Many evergreen real estate vehicles offer multiple share classes designed for different investor channels, such as broker-dealer platforms, registered investment advisers, family offices and institutional investors. These share classes allow sponsors to tailor fee structures and distribution arrangements while maintaining a single underlying portfolio of assets.

I will address those considerations in the next post in this series.

Closing Thought

Evergreen structures do not eliminate liquidity constraints. As discussed in Part 2, liquidity entering the vehicle must ultimately equal or exceed liquidity leaving it.  Evergreen vehicles provide something traditional closed-end funds often lack: a durable platform for raising capital over time.  For sponsors that can access the appropriate investor channels, evergreen structures can become long-term capital formation platforms capable of supporting both portfolio growth and investor liquidity. In that sense, the structure is not just a fund. It is an ongoing capital formation engine.

[1] MSCI, The Ascendance and Implications of Evergreen Funds in Private Markets (Mar. 3, 2026) (reporting that semi‑liquid private‑market funds are rapidly approaching $500 billion in AUM and grew more than 30% over the 12 months through September 2025). 

[2] Morningstar, State of Semiliquid Funds (Jan. 30, 2026) (reporting approximately $493 billion in net assets for semi‑liquid funds as of Q3 2025, based on Morningstar Direct and SEC filings). 

[3] AltsWire, Delaware Statutory Trust Offerings Raise Nearly $5.66 Billion in 2024 (Jan. 12, 2025) (citing Mountain Dell Consulting data on annual DST equity raises).