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December 2020 - Why Middle Market Real Estate with Operating Partners

Chestnut Funds manages real estate investment funds that invest indistinct strategies but with a common denominator of investing in middle market real estate alongside operating partners in properties where the value, simply speaking, exceeds the cost. Chestnut Funds was founded in 2012 after the partners’ collective experience revealed market inefficiencies, that if addressed, could provide meaningful investment opportunities for investors. Now, with six funds in three fund families under management and our third mixed-asset real estate fund launching in early 2021, we remain true to our founding investment thesis.

The Middle Market Value Proposition


Chestnut views middle market real estate as being properties with a value of $5 to$20 million and an equity investment of $1 to $5 million. In our experience, this size range is typically too small for institutional investors but too large for sponsors or developers, what we call operating partners, to easily fund with their own or self-sourced capital. Properties that fall in this size range likely comprise a large portion of the overall commercial real estate market. As such, the market is large and fragmented. And we believe it is this fragmentation that creates inefficiencies that allow for attractive investment opportunities.
















With proper underwriting and exit strategies that seek to sell assets in a portfolio or at a higher value than when acquired, it is our belief that the perceived safety of larger assets may not holdup to analysis due to acquisition prices for those assets.


A competitive differentiator for Chestnut is our focus on investing in middle market real estate located in larger, more dynamic markets that have stronger demand drivers, that in turn, create a more diverse and robust economy. For these reasons, we have found that investment liquidity is typically greater in larger markets, an important consideration when the goal is to sell assets within a particular fund term.

Working With Operating Partners

Another competitive differentiator is that Chestnut cultivates relationships and invests with operating partners for a number or reasons:

  • Operating partners have very particular, valuable expertise, whether that is asset type, geographic market, or investment specialization, such as a focus on development or value-add strategies.

  • Operating partners’ specialization provides access to a diverse and large pipeline of opportunities.

  • Operating partners with competencies that include construction management, leasing, or property management, allow Chestnut to be confident in the execution of the investment strategy during the development, repositioning, and management portions of the investment life cycle

  • Operating partners have relationships with service providers to help deliver projects in alignment with project thesis and budget, as well as the financial return and impact outcomes.

Since its founding in 2012, Chestnut has established a reputation of bringing efficiency to middle market real estate transactions and continues to create goodwill and long-lasting strategic partnerships with local operating partners. We find there are institutional investors and private equity funds that provide equity capital for larger real estate projects but very few that seek to invest specifically in middle market real estate or to aggregate these middle market sized projects into larger portfolios. Most often, operating partners investing in middle market real estate must syndicate the deal to a number of investors. That is essentially our competition. But unlike with the syndication model, operating partners can have some certainty that, assuming the partnership goes well, Chestnut will be interested in making additional investment in future projects. Lastly, operating partners have an appetite todo deals, not raise capital. In fact, raising capital and reporting to investors are probably the two tasks that operating partners least like. When operating partners work with Chestnut, they can avoid these more operationally challenged tasks by combining competencies for mutual benefit.

What's in it for investors?

By creating middle market real estate investment vehicles, Chestnut can provide individual and institutional investors investment opportunities that are otherwise difficult to access, particularly in an aggregated fashion. Like individual investors, institutional investors find our strategy appealing because of middle market real estate’s pricing advantages and our robust pipeline made possible by operating partner relationships. Institutional investors also appreciate the growing size of our funds and their portfolios as they align well with desired investment thresholds. Both types of investors can benefit from the rigor of our investment processes and investor reporting.

The information contained in this newsletter is intended for informational purposes only and is not intended to provide personalized investment advice or to constitute an offer or solicitation to buy or sell securities or interests in any investment. The charts, graphs, and other information contained herein should not serve as the sole determining factor for making investment decisions.


This newsletter cannot be reproduced, shared, or published in any manner without the prior written consent of Chestnut Funds (“Chestnut”). Unless otherwise indicated, all statements and expressions in this paper are the sole opinion of Chestnut and are subject to change without notice. Predictions, forecasts, or outlooks described or implied are forward-looking statements based on certain assumptions, which may prove to be wrong, and/or other events, which were not taken into account, may occur. Any predictions, forecasts, outlooks, opinions, or assumptions should not be construed to be indicative of actual events, which will occur. The opinions and data in this newsletter have been obtained from sources believed to be reliable. Chestnut does not warrant the accuracy or completeness of such and accepts no liability for any direct or consequential losses arising from its use.


Investing in securities involves risk of loss and should not be based solely on marketing materials including the information provided herein. Further, depending on the different types of investments there are varying degrees of risk. Private Funds managed by Chestnut Real Estate Funds and their investors should be prepared to bear investment loss, including loss of original investment. There is no assurance that any specific investment or investment strategy utilized by Chestnut will be either suitable or profitable for your portfolio. Chestnut does not provide personalized or customized investment advice, therefor you are urged to discuss your personal investment situation with the financial professional of your choice before making or changing an investment in a Chestnut offering.


Because of the inherent risk of loss associated with investing in any type of securities, Chestnut Real Estate Funds is unable to represent, guarantee, or even imply that its services and methods of analysis can or will predict future results, successfully identify market tops or bottoms, or insulate you from losses due to market corrections or declines.

MOB Transaction Cap Rate by Dollar Value

Chestnut’s goal when looking at investment opportunities, either as single assets or when considering assets as part of a portfolio, is to make investments in an inefficient market and sell in a more efficient market. This is typically done by creating stabilized properties that attract capital desirous of secure, long-term cash flow or by looking to aggregate assets in portfolios to attract institutional capital.


Data supporting our investment thesis around pricing can be found in transaction data from the medical office building sector. As transaction amount increases, the cap rate decreases, driving higher asset value. Reasons for this that we have identified include the inefficiencies of deploying capital into smaller transactions, the higher competition for larger assets into which investors can deploy larger amounts of capital, and the perceived “safety” of larger assets.

Source: Anchor Health Properties, MOB Market