The US Masters Residential Property Fund – Fees Galore

I was intrigued by the float a few weeks ago of the US Masters Residential Property Fund by Dixon Advisory & Superannuation Services Ltd.

This fund was created to invest in properties in Hudson County New Jersey. According to the fund’s balance sheet (as at 31 December 2011) it has $A18.7m invested in properties in Hudson County and another $A77m in cash, total assets were $A96.7m.

The directors of this entity (none of whom have any experience in the management of property) believe that residential property prices in Hudson County are very low and this was the premise on which they created this fund.

What I was taken aback by was the fees that the fund will pay to the responsible entity (which is controlled by directors of the fund). The responsible entity has the right to charge the fund 2.5% of the value of gross assets (including cash!). The responsible entity is “only” charging 1.59% currently. In addition there is also a “leasing fee”. Oh and I forgot to mention that the responsible entity also received up to 4% of the value of funds initially raised as “structuring and handling” fees.

But let me put that in perspective. If you owned a rental property that was valued at $400,000, would you be prepared to pay someone $6,360 per year to “manage” it for you? You wouldn’t? Well 1.59% of $400,000 is $6,360 and 2.5% is $10,000! And that’s what anyone who has invested in the US Masters residential Property Fund is paying and it’s even worse because they will pay that fee on any cash and other non-property assets the fund holds!

Would you also be prepared to hand over $16,000 if they bought that $400,000 property on your behalf (with your money) as a structuring and handling fee? Of course not, you would have to be mad to do that.

I’m really sick of seeing these sorts of fee structures. The fact that the fee is charged on gross assets rather than net assets also allows the fund to increase debt at some point in the future and take a higher dollar fee. It’s a totally wrong incentive.

It’s also not the type of fee structure that should engender confidence in investors. If the responsible entity took its fees as a percentage of the increase in net asset value and income that it can generate for the fund, I would have far more confidence. But they are effectively saying to investors we have no confidence in our ability to increase net asset value or generate high income from the fund, therefore we will just sit back and take a percentage of gross asset value.

I can rule out this investment for me (at the current price) on six grounds:

1. In my opinion, the directors do not have sufficient property experience;
2. The directors live in Australia, not the US (let alone New Jersey);
3. The fund is not adequately diversified in terms of geography;
4. The fees are excessive;
5. Fees on gross assets incentivize managers of the fund to use debt in order to increase gross assets and generate higher fees;
6. Fees on gross assets get paid on non-property assets like cash. Who pays fees on their own cash?

Please note that as always, none of the above constitutes financial advice. You need to do your own research and consult appropriately qualified people for advice (where necessary).