The compliance playbook for private lending funds has received a major rewrite. With the passage of the One Big Beautiful Act (OBBA), key tax incentives—including the 20% pass-through deduction under Section 199A—have been made permanent. OBBA also increased the asset limit for Taxable REIT Subsidiaries (TRS) from 20% to 25% of total REIT assets, providing greater flexibility for managing non-qualifying income.
For fund managers, this creates both opportunity and obligation. The enhanced tax benefits make REIT structures more attractive than ever, but strict compliance requirements demand vigilance.
Regulation D: The Foundation Still Matters
Private lending funds continue to rely on Rule 506(b) and 506(c) under Regulation D of the Securities Act of 1933. Compliance with Form D filings and state Blue Sky laws remains essential for both your fund and any REIT structures.
- File with the SEC within 15 days of the first securities sale
- Amend for material changes
- Renew annually while the offering remains open
- File in each state where an investor resides
- Late or missing filings can trigger penalties, disqualification, or state bans on future offerings
Accredited Investor Verification
Rule 506(b)
Under 506(b), investors may self-certify accredited status. However:
- Maximum 35 non-accredited investors over the fund’s lifetime
- Once used, those slots cannot be replaced
- Must establish and document pre-existing, substantive relationships with each investor
Rule 506(c)
Under 506(c), fund managers must take “reasonable steps” to verify accredited investor status through third-party reviews—tax returns, CPA letters, or online verification platforms.
2025 SEC Guidance
Recent SEC staff guidance provides a streamlined verification path if these conditions are met:
1. Minimum investment thresholds: At least $200,000 for natural persons or $1,000,000 for legal entities 2. Written representations: Investors confirm they are accredited and did not finance the investment through third parties 3. No actual knowledge: The fund manager has no information suggesting the investor is unaccredited or improperly financed
Operating Within Your Offering Documents
A common compliance pitfall: operating outside the boundaries of your Private Placement Memorandum (PPM). If you fund loans, acquire assets, or pursue strategies not contemplated in the PPM, regulators may view this as securities fraud under Rule 10b-5.
REIT Tax Advantages Under OBBA
The OBBA permanently secured the Section 199A QBI deduction, including the 20% deduction for qualified REIT dividends.
2025 income thresholds for the QBI deduction phase-out:
- Joint filers: Approximately $394,600
- Single filers: Approximately $197,300
REIT structures allow investors to retain the full 20% deduction regardless of income level.
REIT Qualification Requirements
To maintain REIT status, funds must satisfy four ongoing tests:
1. 75% Asset Test
At least 75% of total assets must consist of real estate, mortgages, cash, or cash equivalents.
2. 75% Income Test
At least 75% of gross income must come from rents, mortgage interest, or other real estate-related sources.
3. 95% Income Test
At least 95% of gross income must come from passive sources—including the 75% real estate income plus dividends and interest.
4. 90% Distribution Requirement
At least 90% of taxable income (excluding net capital gains) must be distributed to shareholders annually.
Ownership Requirements
REIT qualification also depends on strict ownership rules:
100-Shareholder Test
A REIT must be owned by at least 100 shareholders for at least 335 days of the taxable year.
5/50 Rule
No more than 50% of shares may be owned, directly or constructively, by five or fewer individuals during the last half of the taxable year.
Managing “Bad Income”
REITs are highly sensitive to non-qualifying income. Examples include:
- Frequent foreclosures or loan sales
- Operating income from commercial properties
- Rent tied to tenant net income rather than fixed amounts
Too much of this activity can trigger “dealer” status or prohibited transaction treatment, potentially terminating REIT status.
- Transfer problematic assets to a Taxable REIT Subsidiary (TRS)
- Hold non-qualifying assets in the parent fund (not subject to REIT restrictions)
- Maintain documentation and conduct periodic reviews of income streams
Operational Compliance: Maintaining Separation
When operating a SubREIT alongside a fund, maintain clear operational boundaries:
- Separate bank accounts for each entity
- Independent books and records
- Documentation of all inter-entity transfers
Blurring these lines invites IRS scrutiny and jeopardizes REIT tax benefits.
Marketing and Communications Compliance
Even well-structured funds face enforcement risk if marketing is mishandled. Key requirements:
- Clearly disclose all investment risks
- Avoid guarantees or misleading return projections
- Don’t offer investment advice without proper licensing under the Investment Advisers Act of 1940
Non-compliant marketing can trigger state enforcement, civil liability, and investor lawsuits.
2025 Compliance Checklist
1. Review and update offering documents to reflect current strategy 2. Track investor residency for accurate state Blue Sky filings 3. Monitor REIT qualification tests regularly 4. Document all marketing and fundraising activities 5. Maintain close coordination with securities counsel and your CPA 6. Leverage the increased TRS limit (now 25%) for non-qualifying income flexibility
How Geraci LLP Can Help
Compliance isn’t just about avoiding penalties—it’s about maximizing structural and tax advantages. The Corporate and Securities team at Geraci LLP works with private lending funds to navigate complex securities, tax, and regulatory rules.
Contact our team to ensure your fund operates efficiently and compliantly, delivering superior after-tax returns to investors while staying ahead of regulatory requirements.
