What Percentage Does a REIT Fund Manager Take?
Real estate investment trusts provide individuals with a tax-efficient way to invest in income-producing properties without the burden of owning and managing property personally. Tax laws require that REITs pay out at least 90 percent of their taxable income as dividends, making REITs an attractive investment for producing an income stream. Some REITs employ their own fund managers on staff, while others hire outside managers. The amount that the fund manager takes can vary widely based on fund performance and management agreements.
Internal or External Managers
Whether a fund is self-managed or hires an external firm, REIT fund manager pay typically follows a multi-pronged plan that includes base pay, performance-based pay and equity awards. Self-managed funds keep their managers on payroll and might not reserve a set percentage each year for manager compensation. Firms that manage funds for REITs have their own expenses, including manager compensation, which they pay out of management fees. Typical charges for management fees can be around 50 basis points – half a percent – of total trust assets, not including separate expense charges.
Ratio of Pay to Assets
Fund manager base pay often corresponds to the size of the fund, with additional bonuses awarded when performance targets are hit. Self-managed funds set their own compensation plans, usually relying on how other REITs in their niche and of similar size pay their managers. External managers must cover administrative expenses and overhead in addition to the manager’s pay package, and they set their fees accordingly. The percentage that managers take can vary. For example, the CEO of Simon Property Group received total compensation of about 4 basis points of assets in 2012. The management firm for Senior Housing Properties Trust, on the other hand, charged about 66 basis points of assets in 2012.
While REIT manager salaries are impressive -- often upwards of $250,000 per year -- the bulk of a fund manager’s pay comes from other forms of compensation. Cash bonuses for meeting certain growth targets are commonly used to encourage fund performance. Typically, bonus thresholds are set relative to the performance of an external metric, such as the S&P 500. Some bonus structures are symmetrical, so the manager runs the risk of owing money if the fund misses the mark, while others only reward met targets and won’t penalize managers for underperformance.
Equity Based Pay
Compensating fund managers with shares of the fund is an increasingly common way of rewarding manager performance. Because shares in a REIT can appreciate in value with successful management, rewarding managers with shares helps tie the interests of REIT managers with those of shareholders. Compensation agreements can also restrict stock awards, forcing managers to forfeit the shares if the fund doesn’t meet certain targets or if the manager leaves her position within a certain amount of time.
Sean Butner has been writing news articles, blog entries and feature pieces since 2005. His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce. He currently advises families on their insurance and financial planning needs.