There are no limits on the fees private real estate funds can charge investors, and several types of fees and charges are associated with private funds. Investors need to understand these expenses before investing. Some of those costs might reduce the value of the total investment and returns. Investors should analyze the costs associated with the benefit of diversification by investing in private real estate funds.




All expenses are disclosed in the fund documents (Private Placement Memorandum and Offering Documents) that explain Fund’s objectives, risks, terms of investment and other policies. Typical fees include, but are not limited to, the following:




Placement Fee




The placement fee is a front-end load (a sales charge that must be paid upon purchase) paid to the placement agent. The placement agent may pay a portion of those fees to affiliated or unaffiliated RIA or BD or any other entities involved in the offer and sale of the private real estate fund interests. 




Organizational and Syndication costs




Those ate the Fees and expenses incurred by or on behalf of the Manager in connection with the formation and organization of the Fund and the Manager and in connection with the offer and sale of Interests in the Fund, including placement agent fees, legal and accounting fees and expenses. Those may equal to 1.50% of Capital Commitments. 




Management Fee




Investors are charged an annual management fee on the AUM (Assets Under Management) of the Fund. This fee is the cost of a fund manager making the investment decisions for you. The fund manager typically receives a fee between 1.00% to 2.00% of AUM. This amount may vary depending on various factors including the type and size of the fund.




Performance or Incentive Fee




In addition to the annual management fee, most private real estate funds charge a performance-based fee (aka “carried interest”). This fee is usually a fixed percentage of the performance and typically accrues only after the fund’s net returns clear a pre-defined preferred rate of return.




Operating Expenses




Some funds may charge Operating Expenses (aka Fund Expenses). While generally considered on-going expenses, those are not paid directly as a fee, instead they are deducted from the fund’s income and will reduce investment returns. These fees are used for legal, accounting, management, loan servicing, technological platforms, marketing of the fund, etc. 




Redemption Fees




Since most of the Funds have a lockup period, some Funds may have fees associated with early-redemptions. Those might vary anywhere from 5% to 10% depending on when the capital gets requested.




Fund of Funds Fees




Some funds may be structured as a fund of funds (FOF) where there are two layers of management fees plus the incentive fees. One layer from the private real estate fund, and another one from the FoF. These Fees can result very high, thus dilute net returns after all fees.




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