LSI 2010 Real Estate Joint Ventures conference materials.pdf

John W. Hanley, Jr. of Davis Wright Tremaine LLP Speaker 20a: 8
interests in all forms of investment funds has become the subject of controversy and a potential
target for tax reform. 5
Finally, the fund documents will speak to other, secondary issues related to distributions
to perspective investors, including the establishment of reserves, the requirement of mandatory
tax distributions, the timing of such distributions, the circumstances (if any) under which a
distribution becomes mandatory because of the occurrence of a particular capital event, and
whether distributions in kind (that is, non-cash distributions) will ever be permitted.
Fees. There is an additional dimension to the economics of a fund for the fund manager.
Typically, the fund manager, or its affiliates, will also collect from the fund, directly or
indirectly, one or more of a host of transaction and management fees. (The fund documents may
also provide that the manager is entitled to certain kinds of expense reimbursements, although it
is relatively unusual for the fund to be obligated to reimburse the manager’s general
administrative and overhead expenses.) These can include the following:
(a) Asset Management Fee. This fee may vary in amount depending on the stage of
life of the fund or other considerations (e.g., a higher asset management fee during the
investment period, when the manager is expected to be more active; a lower asset management
fee after the investment period is closed; and an even lower fee after the fund has entered the
liquidation phase). Typically, the asset management fee is expressed as a percentage of the
capital invested in the venture; during the 2002-2008 era, it was often set in the range of 1% to
2% of total capital commitments during the investment period and 0.75%-1.25% of invested
capital thereafter. Its stated purpose is to (partially) compensate the fund manager for the
administrative burdens taken on by the manager in deploying the fund’s capital and managing
the resulting investments for the fund’s investors. In turn, the fund manager may use some or all
of the fee to create incentive compensation arrangements for individuals within the fund
management company whose performances are judged critical to the success of the fund.
Finally, the fund documents may provide that the asset management fee will be reduced, in
amount, if certain other forms of compensation come to the manager, such as the manager’s
receipt of a share of the placement fees paid by fund investors to their own advisors.
(b) Capital Market Fees. This fee is associated with services provided by the
manager to or for the benefit of the fund in any capital market transaction (in lieu of the fund
using a third party broker or advisor). A capital market fee may be payable in connection with
(i) purchase of a real estate asset, (ii) completion of financing or refinancing of real estate asset,
and/or (iii) sale of a real estate asset by the fund.
(c) Property Management and Leasing Fees. Typically, the fund manager will
bargain for the right to have an affiliate provide both leasing services at each rental property
owned or controlled by the fund (typically compensable by a commission) and property
management services at the property (usually a percentage fee based on gross receipts from the
property).
5 See, generally, “Lawmakers Push to Raise Taxes on Carried Interest,” New York Times, October 14, 2009.
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Law Seminars International | Real Estate Joint Ventures and Funds | 02/09/10 in Seattle, WA
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