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How do nontraded REIT sponsors become eligible for “Subordinated Performance Fees”?

May 3, 2017

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How do nontraded REIT sponsors become eligible for “Subordinated Performance Fees”?

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Answer:  If the REIT achieves a non-compounded average rate of return for shareholders in excess of a stated benchmark (typically 6% or 7%) or hurdle rate, the sponsor is entitled to a share of the excess, typically 15%.  This performance fee does not have a large impact on shareholder returns for most full-cycle events for two reasons:  1) it is only applied to the excess return over the benchmark or hurdle rate, and 2) the fact that it is paid at the end of the shareholder’s holding period means that, due to the time value of money, it has less impact on the average annual rate of return over the life of the investment.  

 

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John E. Moriarty, ChFC
December 2015
February 3, 2016

I have been in the financial services industry for 20 years and our firm provides an education platform that gets clients to “think differently” about their financial picture.  For many years we have communicated to clients the need to diversify their portfolios using alternative asset classes and more specifically, private non-traded investments.  Due diligence on these types of financial vehicles is essential and when I learned about Blue Vault in 2010, our firm immediately began using their material as a tool to build confidence in the minds of our advisors on which alternatives to recommend to clients.  I am impressed with the way Blue Vault continues to add value to their subscribers and I view their publication as a tremendous resource in today’s complex world.