Real estate funds tend to have multiple fees that are paid to the Fund Manager. A typical real estate fund fee structure would include, but not be limited to, Fund Management Fees, Asset Acquisition Fees, Asset Disposition Fees, and Construction Management Fees.
One permutation of the Fund Management Fee structure we have seen in real estate funds before is where the Fund Management Fee has a deduction for general and administrative (“G&A”) expenses for operating the Fund entity. We have seen (on fund vehicles prepared outside our firm) where this arrangement has created serious issues for the Fund Manager as the Fund’s portfolio growth requires more infrastructure to operate and thus the G&A expenses rise in conjunction with such expansion. The issue is most Fund Management Fees are fixed and thus, as the G&A expenses rise, the Fund Manager realizes less net from the Fund Management Fee. We have seen instances where almost the entire Fund Management Fee was being used to cover G&A expenses.
In our opinion – the Fund Management Fee is compensation to the Fund Manager and, as such, should not be used to cover G&A expenses for the Fund’s operations.
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Tuesday June 22, 2021
Category: Capital Formation and Regulation D
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