Management fee base: Financing and investment decisions

The aim of this paper is to focus on different compensation structures for real estate mutual fund Management Companies and assess whether management fees paid on either Net Asset Value (NAV) or Gross Asset Value (GAV) generate distorted incentives relative to those generated by performance fees paid on the market value of the fund. It is found that Management Companies that are paid GAV-based fees start with higher leverage to expand assets under management, then, subsequently, drive leverage and over-investment down as fund maturity approaches to minimize the negative impact of negative NPV investments on the final market value of the fund and therefore on performance fees paid at maturity.