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Homework: REITs and RE Investment Performance Assignment i

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Problem 23-1

Year 1

Year 2

Year 3

Year 4

Year 5

Fund B

An institutional investor is comparing management fees for two competing real estate investment funds. Both funds expect to begin

operations and are accepting capital commitments. When the funds begin acquiring properties, capital calls will be made for capital

contributions during the investment period. Fund A will charge a fee of 45 BP on capital committed and 60 BP on capital invested after

the investment period ends. Fund B will charge a fee of 50 BP on capital committed and 55 BP on capital invested after the investment

period ends. Both funds expect to have $505,500,000 in capital commitments when the fund commences operations and both project

a five-year cycle for startup and acquisitions. Capital flows are expected as follows:

Fund A

Year 1

Year 2

Year 3

Year 4

Year S

Contributed

Capital

$ 202,200,000

303,300,000

Contributed

Capital

$ 383,300,000

282,288,000

Fund A

Fund B

Required A Required B

annotate X

Capital Returned Invested, Capital

$ 202,200,000

505,500,000

505,500,000

494,400,000

353,850,000

$

8

9

101,100,000

50,550,000

23 156.560

Capital Returned

$0

Required:

e. What will total fees be for Fund (A)? For Fund (B)?

If so, which one?

b. Would one of the fee structures cause the manager to want to hold the properties longer before selling than the other fee structure?

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8

50,550,000

101,100,000

what will total fees be for Fund (A)? For Fund (8)?

Invested Capital

$ 303,300,000

505,500,000

505,500,000

454,950,000

353,850,000

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