a. What will total fees be for Fund (A)? For Fund (B)? b. Would one of the fee structures cause the manager to want to hold the properties longer before selling than the other fee structure? if so, which one?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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An institutional investor is comparing management fees for two competing real estate investment funds. Both funds expect to begin operations and are accepting capital commitments. When the funds begin acquiring properties, capital calls will be made for capital contributions during the investment period. Fund A will charge a fee of 45 BP on capital committed and 60 BP on capital invested after the investment period ends. Fund B will charge a fee of 50 BP on capital committed and 55 BP on capital invested after the investment period ends. Both funds expect to have $509,500,000 in capital commitments when the fund commences operations and both project a five-year cycle for startup and acquisitions. Capital flows are expected as follows:


Fund A

  Contributed Capital Capital Returned Invested Capital
Year 1 $ 203,800,000 $ 0 $ 203,800,000
Year 2 305,700,000 0 509,500,000
Year 3   0 509,500,000
Year 4   101,900,000 407,600,000
Year 5   50,950,000 356,650,000


Fund B

  Contributed Capital Capital Returned Invested Capital
Year 1 $ 305,700,000 $ 0 $ 305,700,000
Year 2 203,800,000 0 509,500,000
Year 3   0 509,500,000
Year 4   50,950,000 458,550,000
Year 5   101,900,000 356,650,000

 

Required:

a. What will total fees be for Fund (A)? For Fund (B)?

b. Would one of the fee structures cause the manager to want to hold the properties longer before selling than the other fee structure? if so, which one?

 

Expert Solution
Step 1: Introduction:

Real estate investment funds are collective investment vehicles that combine money from different investors in order to buy, manage, and frequently sell a diverse portfolio of real estate assets. Without the necessity for actual property ownership, these funds give private investors and institutional investors a way to participate in the real estate market. Private equity funds or real estate investment trusts are two different types of real estate investment funds. 

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