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Evaluating Fees in Real Estate Funds

Disclosure:  S2K sponsors real estate investment products and may utilize feesharing or other alignment-focused fee structures in its own offerings. Investors should review each fund’s governing documents and disclosures to understand how any specific product is structured. 

Fees in real estate funds can be complex. They may include development, acquisition, asset management, debt placement, and more, depending on the fund’s structure and strategy: comparing funds on fee basis alone can feel nearly impossible. 

But there’s a revealing question that can help investors understand how they’re affected by them: what happens to the fees that the fund earns from its activities? (And who benefits from them?) 

 

The Standard Model

Many traditional private equity real estate funds follow broadly similar fee models. Many funds charge an annual management fee in the neighborhood of 1–2% of committed, invested, or net asset value. Some funds also charge fees when buying and selling properties, such as acquisition and disposition fees. 

Beyond these, funds that act as General Partner on joint ventures may receive additional fees from those partnerships. For example, when the fund manages development, it can earn development and construction fees. When it arranges financing, it may earn debt placement or similar financing fees, and when it oversees ongoing operations, it may earn asset management fees. 

In many traditional structures, these earned fees are retained primarily by the sponsor. Although this structure is common in the market and reflects the need for the sponsor to be compensated, it can create potential conflicts that investors should understand. 

 

The Alignment Problem

When sponsors earn certain fees regardless of investment outcomes, this can create the potential for incentives that diverge from investor interests, even when other features such as carried interest or preferred returns help to realign them. 

In some structures, doing more deals can increase certain types of fees, which may create a risk that volume is rewarded even if incremental deals are not as fundamentally sound. 

A sponsor earning substantial fees from JV activities may have less financial pressure to ensure each investment meets return thresholds, because the fee income may provide a floor regardless of investment performance. 

This doesn't necessarily mean sponsors with traditional fee structures will make bad decisions. So, are there structures that better align sponsor economics with investor outcomes? 

 

Fee sharing: An Alternative Model

Some funds take a different approach, sharing a portion of earned fees with fund investors rather than retaining them entirely at the sponsor level. 

In a fee-sharing structure, when the fund earns fees from JV activities, a specified percentage flows into the fund alongside investment returns. Investors then participate in fee economics that traditional structures reserve for sponsors. 

The mechanics vary by fund, but the principle is consistent: fee income supplements investor returns rather than existing separately from them. 

 

Fee Sharing Intentions

Fee sharing affects not only the numerical economics but can also reflect how a sponsor chooses to structure its relationship with its investors. It may signal: 

Alignment commitment. Sharing fees typically means the sponsor forgoes some near‑term, contractually specified income, which some sponsors view as a way to demonstrate alignment with investors and potentially support longer‑term relationships. 

Return confidence. Some sponsors may adopt fee sharing when they are comfortable that the overall economics of the fund remain attractive after sharing a portion of fees, but the presence or absence of fee sharing is not a reliable predictor of future returns. 

Relationship orientation. Some view fee‑sharing structures as one way to acknowledge that investor capital enables sponsor activities by allocating a portion of fee‑based economics to the fund, although many sponsors with more traditional fee structures also emphasize long‑term investor relationships in other ways. 

The presence or absence of fee sharing does not indicate or guarantee future performance. Investors should evaluate each fund’s full set of terms, track record, and risks before investing. 

 

Questions to Ask About Fees

  • What fees does the fund earn from JV activities? Understand the full scope of fee income the fund generates. 
  • How are those fees treated? Do they flow to the sponsor, to the fund, or some combination? 
  • What percentage is shared with investors? If there's sharing, understand the specific allocation. 
  • How does this compare to typical industry practice? Fee sharing appears less common than more traditional fee structures in many parts of the private real estate market, but practices vary. Where it is present, it may reflect a sponsor’s desire to emphasize alignment.  
  • Are there circumstances where fee treatment changes? Understand any conditions or thresholds that affect fee allocation. 

 

Key Considerations

Fee sharing is often intended to improve incentive alignment between sponsors and investors, but it does not guarantee investment success. Several fundamental considerations still apply: 

Underlying investment quality still matters most. A fund with fee sharing but poor investment selection is still subject to the same risk profile and potential for loss as one without shared fees. Fee structure is just one factor among many, and in practice investment outcomes are often driven more by sponsor capability, overall strategy, and market conditions. 

Fee sharing doesn't eliminate all conflicts. Sponsors still make decisions that affect outcomes, like which deals to pursue, when to sell, and how to allocate resources. Fee sharing improves incentive alignment but doesn't necessarily make sponsors' and investors' interests identical. 

Compare net economics, not gross structures. A fee-sharing fund with high management fees may deliver less favorable net returns to the investor than a traditional fund with lower overall fees. Evaluate total economics, not just structural features. 

 

Conclusion

When evaluating real estate funds, asking about fee sharing can help you better understand how a sponsor has chosen to structure incentives, alongside other important aspects of the fund. 

The answer will not tell you everything about a fund’s merits, but it can provide an additional and important data point about how the sponsor approaches its relationship with investors.

 

Disclosures

This material is neither an offer to sell nor a solicitation of an offer to purchase any security, which can be made only by the applicable offering document. Neither the Securities and Exchange Commission nor any state securities regulator has passed on or endorsed the merits of our offerings. Any representation to the contrary is unlawful. Investments involve a high degree of risk, and there can be no assurance that the investment objectives of our programs will be attained. Securities are not FDIC-insured, nor bank guaranteed, and may lose value. Consult the offering documents for suitability standards in your state. Securities offered through S2K Financial LLC, member of FINRA/SIPC.