Fees are a well-founded concern of many investors considering an investment in a Qualified Opportunity Fund (QOF). Many Opportunity Funds have been created since the passage of Opportunity Zone legislation, but access to this new exclusive set of tax incentives is largely being marred by onerous fee structures – the potential tax savings for investors are largely being eroded by the fees many funds are charging.
As one wealth management firm put it:
Based on [Opportunity Zone] funds we have reviewed thus far, fees are high. A typical fund is charging a 2% management fee, 20% carried interest, and project development fees. We question to what extent the tax incentives offered by the program are negated by high-fee structures.
As the first online investment platform to create a simple, low-cost way for anyone to invest in real estate, Fundrise has a history of using technology and economies of scale to reduce costs and fees in order to position our investors to earn better net returns.
Unlike many competing Opportunity Funds or more traditional private equity (PE) funds, the Fundrise Opportunity Fund subtracts hundreds of basis points from the standard “two-and-twenty” fee model -– offering one of the most investor-friendly fee structures available:
- A 0.75% annual investment management fee.
- A 0.45% annual tax and accounting fee.
- A 15% performance incentive fee, to be assessed only at the end of the fund’s 10+ year term, and only on returns that exceed an 8% annualized threshold.1 This means that all annual net returns up to an 8% net rate go straight to the investor.
Annual Investment Management Fee
While traditional PE funds typically charge a 2% annual fee, the Fundrise Opportunity Fund charges just 1.2% in annual fixed fees.
Our technology-based approach enables vertical integration, removing layers of middlemen and their fees. Under this unique approach, we are able to dramatically reduce our transactional costs and offer our funds on a direct-to-consumer basis. This not only eliminates the need for commissions and sales loads, it also helps reduce overhead and reporting costs.
As an operator of more than a dozen unique funds, we’re also able to leverage economies of scale, further reducing offering and management costs and fees passed on to investors compared with other funds. This approach helps us cut internal costs and enables us to offer investment management for a fraction of the price of those using a more traditional structure.
Annual Tax and Accounting Fee
Our carefully honed internal systems make it possible to execute at what we believe is likely a much lower internal cost than our competitors. That said, it bears noting that both asset-level due diligence and management, as well as fund-level accounting, reporting, and compliance, require a considerable investment of both time and highly skilled labor.
QOFs must comply with a strict set of regulatory parameters specific to the new Qualified Opportunity Zone legislation. For instance, the fund is required to comply with restrictions such as:
- The submission requirement for Form 8996 to self-certify as a Qualified Opportunity Fund.
- The 90% asset threshold test applicable to all Qualified Opportunity Funds on a biannual basis.
- The 30-month time limit to substantially improve upon the fund’s assets.
- The 12-month timeframe during which the fund is required to redeploy disposition proceeds across new eligible investments.
- The requirement to outline and execute on detailed working capital plans for undeployed assets.
In order to meet these requirements nimbly and cost-effectively, we’ve leveraged our internal tax and accounting resources, as well as our strategic partnerships with esteemed affiliates. This way we can act quickly and help to ensure compliance while limiting costs.
As a result, we apply a low 45 basis point tax and accounting fee—included in the 1.2% we intend to charge in fixed annual fees noted above— which is intended to help defray the expense of efforts requiring highly educated teams with unique experience sets in securities regulations and compliance, fund-level financial reporting, tax structuring, and portfolio management while still keeping investors’ fixed annual fees well below the traditional 2%.
Performance Incentive Fee
The 20% performance incentive fee - the “twenty” in “two-and-twenty” structure - traditionally exists to incentivize alignment between fund managers and investors, and to encourage prudent risk-taking on the part of fund managers. Also known as carried interest, a profit-sharing split, or a promote, this fee typically consumes 20% of all returns above a predetermined hurdle rate or performance threshold.
The Fundrise Opportunity Fund’s performance incentive allocation is lower than typical, at just 15%. Moreover, we also intend to apply this fee only on returns that exceed an 8% annual threshold net of fixed fees - at the high end of the spectrum. This means that only returns above an 8% hurdle net of fees would be subject to an 85/15 split.
It’s important to note that because we operate a multi-asset, diversified fund, our management incentive allocation is based on the performance of the entire portfolio, and not on a singular asset. This contrasts with the fee structures of single-asset funds, which may include complex waterfall structures, particularly if work is performed in conjunction with development partners, who may require their own profit split in addition to that of an Opportunity Fund manager.
Given the structure of our fund and our firm’s full-stack, vertical integration, investors may also benefit from avoiding additional fees charged by working with outside third-party developers.
Since our inception, Fundrise has sought to help investors earn better returns not only by targeting high-quality investments in strong markets, but also by leveraging technology to disintermediate the investment process, and by employing vertical integration and economies of scale to reduce costs passed through to investors.
We believe the Fundrise Opportunity Fund offers a prime example of this strategy as demonstrated by our low, investor-friendly fee structure.
Moreover, Fundrise is committed to providing investors with an unparalleled degree of transparency into their investments - shining a light on fees, rather than obfuscating them beneath layers of legal jargon and complex structures.
We believe that the Opportunity Fund investment vehicle - when combined with a low fee structure - offers investors an unprecedented way to boost their return potential.
You can learn more about the Fundrise Opportunity Fund here.