Fee Structure for Friends & Family REPE vehicle.

Based on the most helpful WSO content, your proposed fee structure and calculations for a friends & family REPE vehicle seem reasonable, but there are a few nuances to consider:

1. 2/20 Structure with High Water Mark:

   • A 2/20 structure is standard in private equity and REPE, even for friends & family vehicles. Using a high-water mark for carry ensures that carry is only earned on net gains above the previous peak NAV, which aligns incentives and is investor-friendly. This makes sense for your evergreen structure.

2. Management Fee Calculation:

   • Your understanding of calculating management fees based on year-end NAV is correct. In your example:
     • Year 1: NAV = $9M → Management Fee = $9M * 2% = $180K
     • Year 2: NAV = $12M → Management Fee = $12M * 2% = $240K

3. Carry Calculation:

   • Your carry calculation also aligns with the high-water mark principle:
     • Year 1: No carry since NAV ($9M) is below the HWM ($10M).
     • Year 2: Carry = (NAV - HWM) * 20% = ($11.76M - $10M) * 20% = $348K.

4. Converting Carry into Ownership:

   • Converting carry into increased ownership is an interesting approach, especially in a cash-constrained vehicle. Your calculation of 348K/11.76M ≈ 3% increased ownership is logical. However, this would dilute other investors' ownership, so it’s essential to clearly outline this mechanism in your fund's operating agreement to avoid disputes.

5. Dividends and Redemptions:

   • Dividends: For an evergreen structure, you could distribute a portion of the cash flow from the properties as dividends, while retaining enough for reinvestment and operational needs.
   • Redemptions: Allowing redemptions in an evergreen fund can be tricky due to the illiquid nature of real estate. You might consider setting specific redemption windows (e.g., annually or biannually) and applying a notice period to manage liquidity.

6. Additional Considerations:

   • Debt Management: Ensure that your leverage strategy aligns with the long-term nature of the fund and doesn’t overexpose the vehicle to market risks.
   • Legal and Tax Structuring: While you’re not focused on legal aspects yet, it’s crucial to eventually consult with legal and tax advisors to ensure compliance and optimize the structure for both you and your investors.

For further resources, you might explore WSO threads on REPE fund structuring or seek white papers on evergreen fund models. These can provide deeper insights into best practices and potential pitfalls.

Sources: Confused about carry at PE Fund, Paying for carry at fund, REPE vs REI, Data: Average Private Equity Compensation and Carry from Associate to Managing Partner, Differences between CRE vs REPE