Matt Dickstein
Business Attorney
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39488 Stevenson Place #100, Fremont, CA 94539

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Private Real Estate Investment Funds

Article #3 – Manager Compensation

In this 6-part series, I explain private real estate investment funds. You have a real estate fund when you accept money from passive investors to do transactions in real estate. A real estate fund is a hedge fund and it is subject to most laws that apply to hedge funds, including securities laws and ERISA. Real estate funds usually are LLCs or limited partnerships, and they have complex terms for investor rights, manager compensation and more.

These are the 6 articles in the series:

  1. Overview
2. Legal Structure of the Fund
3. Manager Compensation     ◄You are here
4. Side Letters and Preferential Terms
5. Securities Law

In this Article #3, I talk about manager compensation.  Things get interesting when we talk about fees.  As a general matter, managers receive a combination of management fees + profit-share + reimbursement of expenses.

Management Fees

For small real estate funds, I frequently set management fees at some annualized percentage of the fair market value of assets under management.  The fund usually pays fees monthly or quarterly.  Fees range from 1 to 3% of assets.  The exact percentage depends on the manager’s track record.  Note that a California registered investment advisor may not take a management fee over 3%.


A fund manager earns a profit-share, aka performance fee or “carry,” based on the performance of the fund.  For real estate funds, the manager can take the fee as a percentage of profits distributed to investors.  The profit-share kicks in when the fund actually distributes money to the investors.

Sometimes the manager takes its percentage after satisfying a hurdle rate in favor of the investors.  A hurdle rate is a minimum return that the investors must receive before the manager can earn a profit share.  There are hard and soft hurdles:

Hard hurdle – The manager gets its profit share on all distributions after returning the investor’s capital contribution + an annual preferred rate (e.g. 5%).  A common formulation is for the fund to distribute all money to the investors until they have received 100% of their contributions plus a 5% preferred return.  After that, the investors and the managers divide all excess profits based on some agreed split, for example, investors 70 / managers 30.

Soft hurdle – The manager gets its profit share on all distributions once the fund achieves the hurdle rate.  Assume a hurdle rate of an 8% return and a 70 / 30 split.  If the fund's annual return does not reach 8%, the manager gets no profit-share.  If the fund achieves an annual return of 8% or more then all profits are split investors 70 / manager 30.

Soft hurdles are tricky – based on this simplified example, for an annual return of 7.99% the manager gets no profit share and the investors get all profits, but for an annual return of 8.01% the profits are split investors 70 / manager 30.  Usually a fund will tinker with a soft hurdle to avoid unfair outcomes.


Sophisticated investors are wary of how the fund pays expenses.  The issue is the allocation of fund expenses either: (i) to the fund (that is, to be paid by the investors), or (ii) to the managers (that is, to be paid by the managers out of their fees).  This issue frequently stays hidden, but it is very important.

What to do about investors who want a special deal and preferential rights over the other investors?  Use a Side Letter – see Article #4 next.

Get a Lawyer

Real estate funds, like all hedge funds, are very complex.  This is not something to learn as you go.  You need the help of accounting, tax and legal counsel who are experienced in the area.

Call me to schedule a legal consultation: 510-796-9144

Matt Dickstein, Business Attorney - 39488 Stevenson Place, Fremont CA 94539
(510) 796-9144

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