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 $500,000,000 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:
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 $500,000,000 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:
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Problem 23-1
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 $500,000,000 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
Year 1
Year 2
Year 3
Year 4
Year 5
Fund B
Year 1
Year 2
Year 3
Year 4
Year 5
Contributed
Capital
$ 200,000,000
300,000,000
Contributed
Capital
$ 300,000,000
200,000,000
Capital
Returned
$0
0
0
100,000,000
50,000,000
Capital
Returned
$0
0
0
50,000,000
100,000,000
Invested Capital
$ 200,000,000
500,000,000
500,000,000
400,000,000
350,000,000
Invested Capital
$ 300,000,000
500,000,000
500,000,000
450,000,000
350,000,000
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?
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