Real Estate Offerings: Hidden Fees and Conflicts of Interest

Halama, William A.
July 2005
Journal of Financial Planning;Jul2005, Vol. 18 Issue 7, p60
Academic Journal
This article examines the multitude of hidden fees and attendant conflicts of interest typically found in offerings of interests in real estate investments, including partnerships, limited liability companies and tenancies in common. These fees are largely, if not entirely, payable without regard to the profitability of the enterprise. But what is most noteworthy is that while the fees are very generally described, the private placement memorandum (PPM) conceals, and does not disclose, their probable magnitude. If the PPM contained some financial projections embodying reasonable assumptions as to fees and promoter compensation likely to be paid, a potential investor or investment advisor would be far better informed. It may well be that this investment will prove to be profitable for investors in spite of the fact that the fees involved can only be described as excessive. Nevertheless, the fee structure digs a huge hole and makes the achievement of profitability far more difficult than necessary. A diligent advisor who is asked to evaluate such an investment should discuss this fact with his or her client and, with the permission of a client, should request that the promoter provide projections of these fees under various scenarios. The lesson for investors and their advisors is to read PPM carefully, address relevant questions to the promoter, and make independent determinations as to the magnitude of promoter fees. Along with other pertinent factors, the magnitude of promoter fees needs to be carefully considered before arriving at a final investment decision. INSET: Executive Summary.


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