Fee Structures in Private Equity Real Estate

Abstract

Although fees in real estate are important for investors and fund managers, they have received little attention in the finance literature. In this paper, I examine fee structures for private equity real estate funds from an investor's perspective. Fee structures, as proposed by fund managers in placing documents, are used to calibrate the total fee load. The average total fee load for closed-end funds equals 2.7%, which is substantially lower than for private equity funds. Through regression and simulation, I show that core and value-add funds charge significantly lower performance fees compared with opportunistic funds, although there is no difference in management fees. Moreover, larger funds charge significantly less management fees. Investors can substantially reduce fees by controlling the amount of leverage and avoiding commitment fees and catch-ups.