Recently, uDirect IRA Services fielded a question: “If a Debt Fund passively invests in notes secured in first position by real estate, would the Plan Asset Rules apply (assuming the 25% test is met)?”

The Plan Asset Rules come into play solely when a plan invests in an “equity interest” in an entity.


Understanding the application of the Plan Asset Rules within the context of a debt fund setup involving investors’ IRAs and real estate note investments is intricate. Always consult with legal and financial professionals specializing in investment regulations for tailored advice.

Plan Asset Rules and the 25% Test

The Plan Asset Rules aim to prevent retirement plan asset abuse by limiting investments in a single entity’s assets. If the debt fund entity (LLC) qualifies as a “plan asset entity,” it could subject the entire entity to ERISA regulations, including fiduciary responsibilities.

Passive Investment in Real Estate Notes

Passive investment in real estate notes by the debt fund may trigger the Plan Asset Rules, especially if the 25% test is met. The notes’ first position security might not exempt them from the rules.

Real Estate Operating Company (REOC) Exemption

The REOC exemption might apply if the debt fund functions like a REOC, requiring substantial managerial control over invested properties. Mere lending to real estate projects may not suffice for this exemption, necessitating active management or participation.

Other Exemptions

Beyond the REOC exemption, other exemptions or safe harbors could apply based on the debt fund’s structure and activities. Explore available exemptions and consult legal experts familiar with ERISA regulations.

While the REOC exemption is worth considering, careful consideration is necessary regarding the application of the Plan Asset Rules and potential exemptions.

Equity vs. Debt

If the Debt Fund issues underlying notes as “Equity Participation Loans,” they wouldn’t lend to their own deals in this scenario.

Classifying Equity Participation Loans under the Plan Asset Rules isn’t straightforward. Despite involving lending, the equity participation aspect might categorize them as equity interests rather than debt instruments. Their structure and perception will determine if they trigger the Plan Asset Rules.


uDirect IRA Services isn’t a legal firm and doesn’t offer legal or investment advice. This article serves educational purposes only. Seek guidance from a competent syndication attorney for legal inquiries.

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