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The Right Fee Structures for the Right REITs (REITs 101 Series)

November 07, 2012 | About:
Certain industries by virtue of their unique characteristics have proven to be stumbling blocks for investors, who are used to reading the financial statements of a typical goods and/or service business.

This is one of many in a series of articles where I reveal the nuts and bolts of investing in unique industries like REITs, etc.

Types of Fees Paid to REIT Managers

Management Performance Fees

- (1) Base Fee Component: Annual base fee of a percentage of the value of real estate assets.

- (2) Performance Fee Component: A percentage of net property income is the most common structure.

Other combinations include a percentage of revenue, growth in DPU or share price outperformance over benchmark indices.

Property Management Fees - property maintenance and tenant services.

- Annual management fee of a percentage of revenue from real estate assets.

Trustee Fees - trust services

- A percentage of property values subject to a minimum

Acquisition and Divestment Fees

- Acquisition/divestment fee of a percentage of the acquisition/divestment price of real estate assets bought or sold.

Other Fees include but are not limited to the following:

- Early termination fee for REIT manager

- Project management fees for development projects

In Closing

Fees are a double-edged sword for REIT investors. High fees eat into the distribution paid out to unitholders, while low fees discourage REIT managers from performing in the best interests of unitholders.

REIT investors should choose REITs with reasonable fees compared to peers and performance fee structures aligned with unitholder interests.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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