Decoding the Fee Stack in REPE

What’s Typical, What’s Not, and What LPs Should Be Watching

Did you know that the concept of carried interest has nautical ⚓️ roots?

Back in the 16th century, ship captains sailing dangerous trade routes were rewarded with a 20% share of the profits from the goods they transported - quite literally, what they carried. It was a straightforward tradeoff: take on risk, share in the upside.

Fast forward to today, and the same term is used in real estate private equity (REPE) to describe the promote (the share of profits sponsors earn after hitting a preferred return). But in modern structures, GPs can start collecting promote long before LPs fully recover their capital, even when they’ve taken on limited downside risk.

The original spirit of shared risk and aligned reward has, in many cases, quietly drifted out to sea (sorry for the pun).

Henry Grâce à Dieu, a carrack. Source: Britannica

REPE fees are often complex, layered, and poorly understood. Sponsors use a variety of fee types that can materially impact net returns. Most LPs agree sponsors should be paid fairly, but excessive or poorly structured fees can erode performance and signal misalignment.

In this article, we’ll cover:

• 🔧 Most common fee structures

• 💰 Typical ranges (aka what’s “market” for asset management, promote, acquisition, and more)

• 🧐 What LPs should pay attention to (including some red flags)

For a deeper dive on waterfalls, read this:

Waterfalls, Part 2: Preferred Returns and Hurdle Rates

Most Common Fees

REPE fees can generally be grouped into two categories: ongoing management fees and transaction-based fees.

A third, critical component is the promote structure (or “carried interest”), which governs profit-sharing. We’ll briefly discuss the issues with catch up provisions and tiered waterfalls.

Let’s dive in.

1. Asset Management Fee

• What it is: a recurring fee paid to the sponsor to manage the asset over the hold period.

• Typical range: 1-2% of total annual income (for one-off deals), funds often charge 1-2% of equity under management. Occasionally, this is calculated on cost basis or even total capitalization.

• Watch for: the fee’s basis: whether it's on invested or committed capital (see table below). Charging fees on committed capital during slow deployment periods can significantly drag down LP returns.

  

  Source: author’s calculations

2. Acquisition/Disposition Fees

• What they are: one-time fees taken at the time of purchase or sale, often as a percentage of the transaction.

• Typical range:

  • Acquisition fee: 0.5%-2% of the purchase price.

  • Disposition fee: Less common, but when present, usually 0.5-1%.

• Watch for: duplication with broker/dealer commissions. If the sponsor is also acting as the broker, LPs should ask for justification and disclosure.

3. Financing Fee

• What it is: a fee for arranging debt financing.

• Typical range: 0.5% -1% of loan amount.

• Watch for: double-dipping with mortgage brokers or placement agents. Is the fee being shared or layered on?

4. Construction Management / Development Fees

• What they are: fees paid for overseeing construction or major capex projects.

• Typical range: 3% to 5% of hard/soft costs for development. For value-add deals, often 2% to 4% of renovation costs.

• Key question: are these being charged when third parties are already being paid for the same functions?

5. Property Management Fee

• What it is: ongoing fee for day-to-day property-level operations.

• Typical range: 2% to 6% of gross revenue.

• Watch for: is the sponsor affiliated with the property manager? Are market rates being benchmarked?

6. Organizational / Fund Formation Fees

• What they are: legal, accounting, and setup costs for fund or deal structures.

• Typical approach: typically passed through as one-time reimbursable costs.

• Watch for: whether these costs are reasonable and capped. Look for transparency in allocation across deals/funds.

7. Personal Guarantee Fee

• What it is: a fee paid to the GP for personally guaranteeing the loan, typically used to compensate for taking on recourse risk.

• Typical range: 1% to 2% of the loan amount.

• Watch for: this fee being charged on non-recourse debt, where the GP isn’t actually assuming any real liability. A red flag 🚩 in my book.

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Promote Structure: How Sponsors Get Paid on Profits

Most REPE deals use a preferred return + promote waterfall to align interests.

• Preferred Return: 6% to 9% is typical.

• Catch-up: many deals include a catch-up provision where the sponsor receives 50-100% of profits above the preferred return until their share matches their promote percentage.
  ⚠️ This is where alignment can get significantly distorted: by allowing GPs to profit even if LPs only marginally clear the pref.

• Promote/Carried Interest: Commonly 20% to 30% of profits after the preferred return is met.

  The LP Punchlist

Common Waterfall Structures:

1. Straight promote: After the pref, profits are split (e.g., 80/20).

2. Tiered promote: Promote increases at return thresholds (e.g., 20% over 8% IRR, 30% over 12% IRR).
   ⚠️ Tiered promotes based on IRR can incentivize excess leverage or financial engineering rather than long-term value creation.

Watch for:

• Whether the hurdle rates are realistic given the strategy.

• If fees come out before or after the pref.

• Whether the GP is required to return capital before receiving promote (a “hard” hurdle vs. “soft”).

Personally, I strongly prefer simpler, return-based structures with no catch-up and clear hurdles. In such structures, GPs earn more only when LPs do well.

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Fee Stacking: Where LPs Get Hurt

While each fee may be justified in isolation, the real issue arises when fees stack, especially across multiple affiliated entities. A vertically integrated sponsor may take acquisition, property management, construction, and asset management fees, all from the same deal.

That’s why total fee load is a critical metric.

What to Ask For:

• A pro forma fee summary showing all expected fees over the hold period.

• Historical examples of net LP returns vs. gross returns.

• Clarity on affiliate relationships and any markup in pass-through costs.

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📌 What LPs Should Pay Attention To

1. Alignment of Interests

   • Is the sponsor generating most of its profit from the promote, or from fees?

   • Is there meaningful GP co-invest?

2. Transparency

   • Are all fees clearly disclosed, both in offering docs and financial reporting?

   • Does the sponsor regularly report on fees actually taken?

3. Market Comparables

   • How does this fee structure compare to peers in similar deal profiles?

4. Scale of Fees vs. Strategy

   • A core-plus deal with light-touch oversight shouldn’t command development-level fees.

   • Fee structures should reflect the operational intensity and risk of the investment.

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Bottom Line

Today we looked at the most common REPE fee structures, typical ranges, and where LPs should dig deeper during diligence.

The key takeaway?

Look beyond the numbers to understand the incentives behind them. When fees are stacked and misaligned, the deal might work on paper. But when the tide goes out, you’ll know whose boat was taking on water.

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New here?

If you liked this article, you’ll enjoy the series on How to Read a Real Estate Pro Forma. Part one here:

How to Read a Real Estate Pro Forma: Part 1

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