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