A Fixed Fee on Capital Raised, Not on Value

Nothing in this paper constitutes an offer to sell, or a solicitation of an offer to buy, any interest in a Woodfine direct-hold solution; any offering is made only by the applicable Private Placement Memorandum. Statements marked "planned," "intended," "targeted," "may," or "expected" are forward-looking and subject to change. Full disclosures appear at the end of this paper.

Working Paper WCP-012 · v0.1.0 · CC BY 4.0

Our thesis is that the fee argument is usually held at the wrong end. An investor asks what the rate is — one per cent, two per cent, what does the manager take — and that is a reasonable question that answers less than it appears to. The more important question is what the rate is charged on. Change the rate and you change how much someone is paid. Change the base and you change what they are paid for.

The distinction matters because of a specific, well-founded suspicion that any careful investor brings to a managed investment, and ought to: does the person looking after my money get paid more when the value of my holding is said to have gone up, even if that increase never reaches me in cash? For the advisory fee in these structures, the answer is no, and the reason is the base. The fee is calculated on the capital that was actually raised and put to work, adjusted over time only for inflation. It is not calculated on whatever the portfolio is currently appraised at. Those two numbers can drift very far apart, and only one of them is a figure someone inside the arrangement could be tempted to influence.

That is the whole of the paper's positive claim, and it is narrower than a claim about total cost. Real costs exist beyond the advisory fee — a capped charge for managing the buildings, a one-time reimbursement of what it cost to make the offering, and, further down the chain, independent firms that introduce investors and are compensated under their own separately regulated arrangements. A reader assessing what an investment costs has to count both layers. We set out both below, and we say plainly at the end of each which parts are contractual commitments and which are not yet being paid to anybody, because at the date of this paper none of this is money changing hands.

1. The thesis

A fee tied to money raised, rather than to money currently valued, is structurally incapable of rewarding an advisor for an appraisal going up. It can only grow if more capital is raised and deployed — which requires investors to have decided, with their own money, that the thing is worth funding further.

Two numbers are involved and it is worth naming both before going further, because the argument is entirely about the difference between them.

Gross Funded Value is the total value of capital raised and deployed. It is a historical fact about how much money came in and went into the ground. It changes when a new offering closes and capital is put to work. It does not change because a valuer revisits a building.

Net asset value is an estimate of what the assets are worth now, less what is owed on them, at a point in time. For a portfolio of buildings that are not being sold, it is produced by appraisal — a professional's considered estimate — not by a transaction. It moves with market conditions, with the assumptions fed into the appraisal, and with judgement.

Both are legitimate numbers that serve real purposes. An investor wants to know the second one; it is the honest answer to "what is my holding worth." The claim here is only about which of the two a fee should be calculated on, and the answer follows from a single observation: one of these numbers can be influenced by the person being paid, and the other cannot. The two figures coincide only by coincidence, never by design.

2. The problem, in the reader's terms

The familiar version of this problem does not require any knowledge of commercial property to understand, because most readers have already met it.

A management fee is what an investor pays annually for someone else to look after an investment. In most managed funds — mutual funds, hedge funds, private real-estate funds — it is expressed as a percentage of assets under management: the current value of everything the manager is looking after on the investor's behalf. This is so standard that it is rarely questioned. It has one consequence that deserves questioning. When markets rise, the manager's income rises with them, whether or not the manager had anything to do with the rise, and whether or not the investor has received a penny. When markets fall, the fee falls too, which sounds like alignment and mostly is not, because the fee is being collected the whole way down.

Now consider the version of that arrangement where the asset is not a listed share with a price anyone can look up, but a building that has not been sold. Nobody knows what it is worth. Somebody has to say. And the person saying it, or instructing the person saying it, may be the same person whose fee depends on the answer.

Here is the everyday shape of that problem. Two appraisers are asked what a property is worth. The first is paid a flat professional fee for the report, the same amount whatever number the report contains. The second is paid a share of the number in the report. Neither appraiser has to be dishonest for their reports to differ. Judgement is required at a dozen points in any valuation — which comparable sales to use, what rate to capitalise income at, how much vacancy to assume — and a person with a stake in the outcome will, in perfect good faith, tend to resolve those dozen judgements in a consistent direction. The first appraiser is the arrangement you want. The second is the one almost every value-based fee quietly creates.

This is not a hypothetical worry raised by critics of the industry from outside it. Academic work on private-market performance has spent two decades documenting how far the headline figures the industry reports can diverge from what investors actually received, and has traced a good part of that gap to the measurement conventions the industry chose rather than to any bad faith [phalippou-2011-confusing-evidence]. The same body of work finds that, net of all fees, private-market funds have broadly returned what public equity markets returned over the same period, while the performance-related payments those funds collected over a single decade of fund vintages ran into hundreds of billions of dollars [phalippou-2020-inconvenient-fact]. Whatever one makes of that argument, its existence is the reason a structure claiming alignment should be willing to say exactly what its fee is calculated on and let a reader check.

3. What the fee is calculated on, and who receives it

Two questions get confused with each other, and the confusion is exactly where fee misstatements happen. What is the fee charged on is a question about the base. Who does the money go to is a question about parties. They have different answers and both need saying.

The base

In the established Canada vehicle, the variable fees a conventional real-estate fund charges — an acquisition fee when a property is bought, an asset-management fee for holding it, a financing fee when debt is arranged, a disposition fee when it is sold — are replaced by a single fixed annual overhead contribution calculated on that vehicle's Gross Funded Value. It is a fixed percentage of the capital raised and deployed, carrying only an inflation adjustment over time. It is not a percentage of a marked net asset value, and it is not recalculated when a building is revalued.

Three consequences follow, and each is checkable rather than promised.

The fee does not grow as the assets appreciate. A vehicle whose appraised value doubles does not generate twice the fee. The fee grows only if more capital is raised and put to work.

The fee is calculable at the outset. An investor who knows the capital raised and the rate can work out the total management overhead for the whole holding period before subscribing, without forecasting anything. That is unusual. Under a value-based fee, the total cost over a long hold is unknowable at the start, because it depends on a future valuation series nobody has yet produced.

And the fee cannot be increased by influencing a valuation, because the valuation is not in the formula. The partnership's governing agreement does not leave this as a design preference that a later amendment could quietly reverse. It prohibits the partnership from paying any person a fee, reward or inducement of any kind calculated by reference to the net asset value of the assets it owns, or by reference to a change in that value. The prohibition is written against any recipient — not only the general partner, not only the advisor, not only entities related to the promoter. There is no one to whom such a fee could lawfully be paid under that agreement.

The parties

The fee is paid to Woodfine Advisors Inc., the retained advisor to the partnership, under an advisory services agreement with the partnership's general partner. Naming the recipient precisely is not pedantry. Woodfine Advisors Inc. is the entity engaged to provide procurement, development and management services; it has no employees of its own and retains others, including the group's operating-services company, to carry out the work. The staff who do the work and the entity that receives the fee are therefore not the same, and describing the fee as going to whichever party performs the underlying labour would state something untrue about where real income goes.

Around that single relationship the agreement builds a closed list rather than a floor. Its fee article enumerates, item by item, who may charge the partnership and for what: the promoter recovers one per cent of gross proceeds from each offering as partial reimbursement of the offering costs it has paid; the general partner recovers its reasonable out-of-pocket costs of acting as general partner, at cost, with no margin; the advisor is paid the fees set out in its agreement plus approved third-party costs; and each property-holding company caps its retained third-party property manager at six per cent of the gross income the buildings it owns generate. Nothing not named in that article is authorised. A second rule closes the obvious route around it: apart from the advisor's fees, no subsidiary or affiliate of the promoter is entitled to receive fees from the partnership at all. A promoter's corporate family can be large, and without that rule compensation could migrate from one disclosed, capped arrangement into an undisclosed one on different terms.

What the developer is paid with

There is a second half to the compensation design, and leaving it out would make the fee look smaller than the arrangement really is.

In a conventional private-fund structure the manager's profit comes as carried interest — a share, commonly around a fifth, of the gains above an agreed threshold, paid out in cash as distributions are made. It is genuinely performance-linked, and it is also cash leaving the vehicle while investors are still waiting to get their own capital back.

Here, developer profit is intended to be taken as equity in the vehicle rather than as cash: units issued in place of cash carried interest, held in escrow. In the established Canada vehicle those units are held through a special-purpose subsidiary, the promoter keeps the votes attached to them throughout, and they do not become freely disposable until limited partners have recovered one hundred per cent of the capital they contributed, or another defined liquidity event occurs. The developer's realised profit is therefore behind the investors' capital in the queue, not alongside it.

There is a term for the consequence that follows on the fee side. Preserved Fees are cash management fees available to asset managers as a result of equity carry — that is, because the developer's own profit is taken as equity rather than drawn from the vehicle's cash, the single fixed overhead contribution is not largely consumed by the sponsor, and remains available to compensate the independent asset managers who act for international and institutional investors reaching the platform through their own vehicles. Those managers are fiduciaries engaged at arm's length from the group; they sit outside it, and they have to be paid from somewhere. Under a conventional fee structure the sponsor's own take leaves a thinner pool for them.

None of the above is currently being paid. There are no external investors in any vehicle today. No compensation units have been issued, nothing is held in escrow, no retained equity exists on any vehicle's balance sheet, and no Preserved Fees have reached any independent asset manager. Nor could the arrangement currently be extended: the one established vehicle's units are subject to an active cease-trade order issued by the British Columbia Securities Commission, arising from delayed continuous-disclosure filings rather than any finding of fraud or misconduct, and it must bring its outstanding filings current and obtain the Commission's revocation before any future offering of units can close. These are contractual terms intended to apply once external capital is raised, not a record of payments already made.

4. The layer this does not cover

A paper that stopped there would have answered a narrow question accurately and left a reader with a wrong impression of total cost. The advisory fee is one layer. It is not the only one, and the others are not hidden — they are simply elsewhere, which is not the same thing as being disclosed together.

The everyday version of this is buying through an intermediary. A manufacturer sets a price. A retailer adds a markup. Both are legitimate, both are disclosed somewhere, and a buyer who reads only the manufacturer's price list has not learned what the thing costs. Financial products work the same way and the second number is less visible.

Three further layers are worth a reader's attention here.

Operating the buildings costs money and that cost is capped, not eliminated. Each property-holding company must retain a third-party property manager, and the agreement limits that manager's fee to no more than six per cent of the gross income the buildings that company owns generate. The cap is set property by property rather than across the portfolio, so a strong building cannot be used to justify a larger fee on a weak one. This is a real cost, not a notional one, and it is separate from the advisory fee.

Making an offering costs money, and part of that cost is reimbursed. Woodfine pays the costs and expenses of each offering of units. The partnership's agreement then provides for reimbursement of one per cent of the gross proceeds of an offering as partial payment of those costs. It is one-time, tied to a specific offering, and is not a recurring management fee. It is also, plainly, a payment from the vehicle to the promoter, and it belongs in a reader's arithmetic.

Capital does not arrive by itself, and the people who bring it are paid under their own rules. An investor does not subscribe directly from Woodfine. Each offering is intended to be distributed on a best-efforts basis through one or more registered securities dealers acting as agents of the vehicle — soliciting subscriptions without committing to buy any unsold portion themselves, with one designated as the lead agent to coordinate the group. Those dealers are separately registered and separately regulated firms. They are paid a fee for that work, and the commission arrangement for any given offering is a term of that offering. No commission rate has been set or named for any of these vehicles. That is a real gap in what a reader can currently price, and stating it is more useful than implying the sponsor's own fee is the whole picture.

Two points of discipline about this section. First, it is not an alarm. Every item in it is an ordinary cost of doing the thing, and a structure with no property manager, no offering costs and no distribution channel would not be a cheaper investment — it would be a different and probably worse one. Second, the paper's positive claim survives all of it intact. The advisory fee specifically cannot rise with asset value. That is the claim. The existence of other costs alongside it does not weaken the claim; concealing them would.

What this changes for the reader

The first change is that a promise becomes a test.

Almost everything a sponsor says about alignment is unfalsifiable. "Our interests are aligned with yours" cannot be checked. A fee base can. Once a vehicle is filing publicly, an investor can take two numbers out of the disclosure record — the capital raised and deployed, and the appraised value of the assets — and watch which one the reported fee actually tracks over several periods. If the fee moves with capital raised and not with reported value, the claim in this paper is true in that period. If it moves with value, it is false, and the investor will know without needing anyone's assurance. That is the whole point of arguing about the base rather than the rate: the base is a claim you can hold a company to.

The second change is a question worth carrying into any investment, not just this one. Not "what is the fee?" but "what is the fee charged on, and who chooses that number?" If the answer is a valuation produced by or at the direction of the person being paid, the investor has learned something important that the rate alone would never have told them.

The third is a correction to a natural but mistaken inference. A fee that cannot rise with value is not a low fee, and this paper does not claim one. It is a fee with a different shape. Over a long hold in a rising market it will very likely be smaller than a value-based alternative; in a falling market it will be larger, because it does not fall when values fall. An investor who dislikes that trade is entitled to dislike it. It is a trade, and it should be presented as one.

The trade-offs belong in the same breath. A fixed base means the advisor's income does not shrink when the portfolio does — protection for the advisor, paid for by investors, in exactly the years investors would least like to pay it. A fee set at the outset can also turn out to be badly sized if the vehicle ends up much smaller or much larger than planned; the fee has no mechanism for noticing. And the second and third cost layers described above remain genuinely incomplete for a reader today, because no commission arrangement has been set. Those are real limits, not rhetorical ones.

An open invitation

The questions this paper leaves open belong to people who study fund economics for a living rather than to people who build buildings.

To researchers in fund-fee economics: the honest open question is whether a base this narrow creates distortions of its own. A fee that grows only with capital raised gives an advisor a strong reason to keep raising capital and, at the margin, a weaker reason to grow the value of what has already been raised — the mirror image of the problem it was designed to solve. We think the escrowed-equity half of the compensation design answers that, because the developer's own profit sits in the same units investors hold and is released only after their capital comes back. We have not tested it, and it is the kind of claim that should be tested against a real structure rather than asserted. If the incentive to grow value weakens measurably once a vehicle's capital-raising slows, we would rather know.

To researchers on valuation and appraisal independence: the argument here assumes that removing valuation from the fee formula meaningfully reduces valuation pressure. That is plausible and it is not proven. Valuation still matters in this structure — it sets the price of units in later sales periods, it determines the appraised value at which certain buyout and divestment mechanics operate, and it is what an investor reads to know what their holding is worth. The pressure may simply relocate rather than disappear. Work that identified where it relocates to would be more useful to us than a confirmation that we moved it.

To anyone working on fee-disclosure standards for retail-accessible private products: the gap this paper had to admit — that the distribution layer's compensation is real, separately regulated, and not yet stated anywhere a prospective investor can read it alongside the sponsor's own fee — is, as far as we can tell, an industry-wide reporting gap rather than a peculiarity of this structure. A standard that put both layers on one page, in one place, in comparable terms, would be an improvement we would adopt rather than resist.

Conclusion

The structural fact in this paper is not that fees here are low. It is that the advisory fee is calculated on a number nobody inside the arrangement can move: the capital actually raised and deployed, rather than the current estimated value of what it bought. The governing agreement does not merely prefer that base — it forbids paying anyone a fee calculated by reference to net asset value, and it limits who may charge the partnership at all to a closed list. Developer profit is taken in the same units investors hold, and released only after investors have their capital back. Alongside that sit other real, separately disclosed costs, including one whose terms are not yet set. A reader who takes one thing from this paper should take the question rather than the answer: ask what the fee is charged on, and who decides that number.

References

Phalippou, L. 2011. Why is the evidence on private equity performance so confusing? University of Oxford, Saïd Business School. https://ssrn.com/abstract=1864503

Phalippou, L. 2020. An inconvenient fact: private equity returns and the billionaire factory. University of Oxford, Saïd Business School; forthcoming, Journal of Investing. https://ssrn.com/abstract=3623820

Canadian Securities Administrators. National Instrument 51-102 — Continuous Disclosure Obligations. https://www.bcsc.bc.ca/securities-law/law-and-policy/instruments-and-policies/5-ongoing-requirements-for-issuers-insiders/current/51-102

Canadian Securities Administrators. National Policy 51-201 — Disclosure Standards.

Contributors

Prepared by Woodfine Management Corp.

How this paper was produced

This paper is grounded in the operating and development work the preparing staff do themselves, and in what they have learned from the people they work with routinely: the graphic designers, web developers, and software developers and engineers who build the platform alongside them, and the architects and structural, building-services, and civil engineers they develop buildings with. No outside professional reviewed or approved this paper, and nothing in it is professional advice. It was drafted and edited with AI assistance under editorial direction, and the analysis and conclusions are Woodfine's own.

Disclosures

Woodfine Capital Projects Inc. ("Woodfine") is the author of record and is the developer and promoter of the structures described in this paper; Woodfine Management Corp. employs the staff and retains the consultants who prepared this material. Woodfine has a direct commercial interest in the compensation model argued for here. This work was funded internally; no external research funding was received. Nothing in this paper constitutes an offer to sell, or a solicitation of an offer to buy, any interest in a Woodfine direct-hold solution; any offering is made only by the applicable Private Placement Memorandum, which prospective investors should review with their own professional advisors. The fee terms described are provisions of a governing limited partnership agreement summarised here in plain language; that agreement, and not this paper, governs, and a prospective investor should read it rather than rely on this summary. This paper states no fee rate, commission rate or dollar amount for any vehicle, and none should be inferred from it. Only one direct-hold vehicle is established; its units are subject to an active cease-trade order issued by the British Columbia Securities Commission, arising from delayed continuous-disclosure filings rather than any finding of fraud or misconduct, and it must bring its outstanding filings current and obtain the Commission's revocation before any future offering of units can close. Some statements above describe planned or intended future arrangements; language such as "planned," "intended," "targeted," "may," and "expected" marks this forward-looking content, which is subject to change and does not constitute a commitment regarding future performance.

Data and reproducibility

There are no measurements in this paper. Every substantive statement in it is either a term of a governing agreement or a statement that something has not yet happened, and the two carry different weight.

The contractual terms — the Gross Funded Value fee base, the prohibition on any fee calculated by reference to net asset value, the closed list of parties who may charge the partnership, the one per cent offering-cost reimbursement, the six per cent cap on each property-holding company's retained property manager, and the escrow condition releasing developer equity only after investors recover the whole of their contributed capital — are provisions of the established Canada vehicle's own governing agreement. They are commitments, not observations, and they are specific to that vehicle: the United States, Spain and Mexico vehicles are planned and will be governed by separate instruments not described here. A reader relying on any of them should read the agreement.

Two figures in this paper are quoted because they are already stated in the company's public disclosure: the one per cent offering-cost reimbursement and the six per cent property-manager cap. The rate of the advisory fee itself is deliberately not stated here, and neither is any dealer commission, because neither has been published and a working paper is not the place to publish a fee rate for the first time. A reader who wants those numbers should expect them in an offering document, not in this paper.

Nothing described here is in operation. There are no external investors in any vehicle today, no equity-based compensation units have been issued, no units are held in escrow, no retained equity exists on any vehicle's balance sheet, no Preserved Fees have been received by any independent asset manager, and no Woodfine Building has been constructed. No independent party has reviewed the fee structure described here or verified this paper's description of it against the underlying agreement.

Woodfine Capital Projects™ is a trademark of Woodfine Capital Projects Inc.