How to Start a Real Estate Debt Fund

Everything about the fund — target yield, loss profile, leverage tolerance, who your competition is — follows from where you lend. The PPM should commit to a primary position and cap the rest:

At portfolio scale, most real estate debt funds don't run unlevered — they finance the book to make senior yields work for LPs. A warehouse or repo line from a bank funds a portion of each eligible loan; a 60% advance rate turns a 9% loan into a low-teens return on the fund's equity slice, before losses and fees.

Leverage is also the fund's most dangerous feature, and LPs will read this section of the PPM first. Commit to a maximum facility-level and portfolio-level leverage ratio, name the recourse posture (mark-to-market provisions on warehouse lines are what killed levered debt funds in past cycles), and explain what happens if the line is pulled: an unlevered fallback plan is the difference between a drawdown and a forced liquidation. Some first-time funds launch unlevered on purpose and say so — it's a slower-yield, cleaner-risk pitch that many LPs prefer from a new manager.

Equity funds mark to appraisal; debt funds must decide how to recognize trouble before it's a realized loss. Institutional LPs expect a written policy: how loans move to watchlist status, when a loan is placed on non-accrual (stop recognizing income you may not collect), how specific reserves are sized against impaired loans, and whether the fund carries a general reserve against the performing book.

This matters doubly in an income vehicle, because distributions and redemptions both price off NAV. A fund that keeps paying full distributions on accrued-but-uncollected interest is quietly transferring value from remaining LPs to exiting ones. Your administrator and auditor will enforce a policy eventually — writing it into the fund documents at launch is what the institutional version looks like.

The structural failure mode of open-end debt funds is borrowing short from LPs while lending long to borrowers. The discipline is duration matching: redemption capacity should come from natural portfolio runoff — payoffs and amortization — not from selling loans into a bid that disappears exactly when redemptions spike.

Practically: a book of 12–24 month bridge loans can support quarterly redemptions on 90 days' notice with a gate; a book of 5-year fixed-rate loans cannot, and should be a closed-end fund or carry much longer notice. Size the lockup, notice period, and gate off the weighted-average life of the intended book, and show that math to LPs — allocators who've lived through gated funds respect a manager who gates on paper before being forced to in practice.

A fund-sized book needs repeatable origination: direct relationships with sponsors and developers, mortgage-broker networks with your box priced in their heads, bank participations, or purchases from originators who sell what they write. LPs will ask what share is proprietary versus brokered versus purchased — purchased paper without your own underwriting on each file is the red flag they're probing for.

The origination story also has to survive your fund's growth: the pipeline that fills a $25M fund at your LTV discipline may not fill $100M without loosening the box. Being explicit about capacity — the deployment pace the pipeline supports at stated discipline — is the credit-fund version of a hedge fund's capacity number, and it's a first-close selling point.

The Fund Builder models the fund — target raise, capital-stack allocation limits, leverage caps, fee basis and hurdle, distribution policy, lockup and redemption terms — so the leverage policy an LP reads in the deck is the one in your documents. Scroll Deck presents the capital-stack positioning and income profile with the fund's actual economics; Legal Canvas prepares the formation and offering documents for independent counsel review. The fund formation package is $6,000, documents prepared in days rather than months, and the generated fund site plus marketplace listing give the raise an institutional front door.