The objective of this module is to clarify the calculation and disclosure of the INREV fee and expense metrics: the Total Expense Ratio (“TER”) and the Real Estate Expense Ratio (“REER”). These form part of the standard measures included in the regular reporting of overall performance to investors in a vehicle. When analysed in the context of vehicle style, investment strategy and underlying risks, these fee and expense metrics will help those involved in the non-listed real estate market – both institutional investors and managers – to compare fee and cost structures between different non-listed vehicles and with other investment structures.
INREV aims to improve consistency in the presentation and categorisation of fees and costs when comparing vehicles from different domiciles. While it may not be possible to achieve complete consistency in breaking down expenses, the aim is to provide the greatest possible comparability while also maximising the availability of relevant information in fee and expense metrics. INREV fee and expense metrics have been designed to be straightforward, easy to understand and compatible with the vehicle’s normal reporting cycle.
Fee and expense metrics should reflect the nature of the expenses concerned, in line with the various types of services for which managers charge fees, and the basis on which they charge them.
It is important to analyse and explain the INREV metrics in their correct context. For instance, the TER for different vehicles should be compared taking account of historical and forecasted return.
At vehicle launch, investors have a particular interest in understanding its forward-looking or projected operating expenses compared to the amount of invested capital, as well as the potential impact of the cost structure on the overall investment return. Accordingly, INREV supports the principle of including forward-looking expenses in the vehicle’s launch documentation.
The principles and guidelines for reporting fee and expense metrics are listed below. Where appropriate, further explanation is provided to enhance the reader’s understanding. In addition, the Tools and Examples section includes a typical calculation of INREV fee and expense metrics.
Comparability - Fees and costs should be consistently categorised and presented, to enable investors and managers to compare fee and cost structures between non-listed real estate vehicles.
Transparency - There should be clear and appropriate disclosure of the fees and costs charged to the vehicle. Communication of all relevant information should be open, accessible and easy to understand.
Vehicle documentation should include a statement of the level of compliance with this module and of the fee and expense metrics that are expected to be disclosed to investors by the manager.
Fees and costs should be measured in line with the principles defined under INREV NAV and INREV GAV.
Fees describe charges borne by the vehicle for services provided by the manager and costs describe charges to a vehicle by external service providers. Fees charged by the manager directly to their investors are not taken into account, with the exception of fees charged for services rendered to the vehicle.
Where a single fee is charged to cover a variety of activities, the constituent elements will need to be identified, allocated to the appropriate cost category and disclosed appropriately.
Historic Total Expense Ratio
An historic TER, including and excluding performance fees, based on both the time-weighted average INREV GAV and the time-weighted average INREV NAV of the vehicle over one year, should be provided annually.
TER is expressed as a percentage of time-weighted average INREV NAV. However, the degree of leverage within a vehicle distorts the comparability of the measure when it is based on NAV. It is therefore also expressed as a percentage of INREV GAV.
The components of the numerator include the vehicle fees and costs for the reporting period, as defined below.
The components of the numerator include the vehicle fees and costs for the reporting period, as defined below.
Some fees, such as property-level fees charged by the manager, should not be included when calculating the TER; they do however form part of the REER (see below). If the manager charges a single fee covering both property and vehicle management activities, it should be split into its constituent elements.
TER should be disclosed both including and excluding performance fees, due to various structural methods of distribution, and each calculation should be separately disclosed.
The formulae for TER are:
The TER is an historic or ‘actual’ figure, based on data published annually. Consequently, newly launched vehicles cannot have an historic TER.
Historic Real Estate Expense Ratio
An historic REER, based on the time-weighted average INREV GAV of the vehicle over one year, should be disclosed annually.
While the TER relates to the operating costs borne by the vehicle, the REER captures only those costs that relate to the management of the real estate assets. The REER includes the property-specific costs described below.
The numerator should include the fees and costs associated with managing the properties, while the denominator should be the time-weighted average INREV GAV.
The formula for REER is:
Forward-looking ratios and metrics are useful items in the vehicle documentation. However, they are ‘theoretical’, in that they are based on estimated costs, anticipated numbers of assets, and assumptions such as growth rate, vehicle life and tax structuring. Requirements for forward-looking fee and expense metrics at the vehicle launch stage are described below. Once the vehicle has commenced operations, there should be no further requirement for forward-looking metrics as historic metrics based on historic data should then be available.
Forward-looking total expense ratio
A forward-looking TER, based on both the time-weighted average INREV GAV and the time-weighted average INREV NAV for the first year when the vehicle is expected to be stabilised, should be provided in the documentation. These measures should be calculated following the same methodology as for an historic TER, although they will be based on estimates.
The forward-looking TER is calculated after performance fees, such that all vehicle costs as set out below are taken into account.
The forward-looking TER should be accompanied by disclosure of the estimates used to calculate this metric.
Forward-looking real estate expense ratio
A forward-looking REER, based on the time-weighted average INREV GAV of the vehicle for the first year when the vehicle is expected to be stabilised, should be provided in the documentation. This should be calculated following the same methodology as for an historic REER, although it will be based on estimates.
The forward-looking REER should be accompanied by a disclosure of the estimates used to calculate this metric.
Expense ratio cost classification
Fees and costs should be classified consistently for the purpose of calculating the INREV fee and expense metrics.
They should be classified as follows:
Vehicle fees included in the TER comprise:
- Asset management fees (certain services);
- Fund management fees;
- Performance fees (including carried interest);
- Wind-up fees.
Vehicle costs included in the TER comprise:
- Audit costs;
- Bank charges;
- Custodian costs;
- Dead deal costs;
- Other/miscellaneous vehicle costs;
- Other professional service costs;
- Transfer agent costs;
- Valuation costs;
- Vehicle administration costs;
- Vehicle formation costs (amortisation for the period).
The costs incurred by Special Purpose Vehicles (“SPVs”), which sit above the acquisition structure in the holding structure, are included in vehicle expenses. Costs of this nature that are charged to the acquisition vehicle should also be included in this category.
Property fees included in the REER are directly attributable to the management and the maintenance of specific properties. These fees comprise:
- Asset management fees (certain services not included in the TER);
- Internal leasing commissions;
- Property acquisition fees (amortisation for the period);
- Property management fees.
Property costs included in the REER are directly attributable to the management and the maintenance of specific properties. These costs comprise:
- External leasing commissions;
- Property acquisition costs (amortisation for the period);
- Other/miscellaneous/sundry costs;
- Property insurance costs;
- Property management costs;
- Repairs and maintenance costs;
- Taxes on property-related activities;
- Utilities costs (non-rechargeable portion).
Fees and costs excluded from the TER and REER comprise:
- Deferred taxes on property-related activities
- Development costs;
- Disposition costs;
- Fair value adjustments;
- Financing costs;
- Financing fees charged by managers;
- Gain/loss on currency exchange rates;
- Gain/loss on investment disposition;
- Goodwill write-off;
- Impairment of goodwill;
- Losses on disposal of subsidiaries;
- Payments related to financial derivatives;
- Project management fees;
- Provisions and allowances;
- Receivables write-off costs;
- Rent free/discounts;
- Securities handling charges;
- Share of losses of associates and joint ventures;
- Taxes on real estate transactions;
- Unwinding of discounts and effect of changes in discount rate on provisions.
The constituent elements of the metrics calculations should be disclosed annually.
|Disclosure table||% NAV||% GAV|
|TER before performance fees (note A)|
|TER after performance fees (note B)|
|REER (note C)||-|
The following notes clarify the components of each fee and expense metric and should also be read in conjunction with the classifications shown in the fees and costs matrix.
Time weighted average INREV NAV
Time weighted average INREV GAV
A. Includes vehicle fees and costs
B. Includes vehicle fees and costs, and any performance fees which have either been paid, accrued, or disclosed as a potential liability, and were included in the INREV NAV and INREV GAV
C. Includes property fees and costs
There should also be a clear disclosure of all the fees charged by the manager and the activity to which they relate. A disclosure table should be presented annually providing an analysis of all components of the fees (including any element of performance fee) earned by the manager or by any other affiliate or related party of the manager, for the management of the vehicle.
|Fees earned by the manager disclosures||20XX Currency||20XX Currency|
|Asset management fees|
|Fund management fees|
|Internal leasing commission fees|
|Property management fees|
|Project management fees|
|Property acquisition fees|
|Property disposition fees|
|Other related fees|
|Total fees earned by the manager|
The fees included in this table should be accounted for in the financial statements for the financial reporting period concerned, in accordance with accounting conventions used by the vehicle.
How should the INREV GAV be calculated for the INREV Total Expense Ratio (TER) and the Real Estate Expense ratio (REER)?
For the disclosure of the INREV TER and REER a calculation based on INREV NAV and INREV GAV is required.
In using/preparing the INREV TER and REER the question might arise about which components should be included in calculating the (INREV GAV) denominator of these ratios.
The fund manager should be transparent in its reporting to investors and explain the methodology and assumptions used for the calculation of the GAV, as required by both INREV NAV and Fee and Expense Metrics modules.
The Total Assets derived from Generally Accepted Accounting Principles (GAAP), including IFRS, could be used as a starting point in the calculation of the denominator of the ratios presented in the Fee and Expense Metrics module.
INREV suggests to start from the same accounting framework as it was used in calculating the INREV NAV, i.e., IFRS, local GAAP or other vehicle specific GAAP.
From there, the various adjustments should be included, or excluded, to come to an INREV GAV that can be used in the calculation of the INREV TER and REER.
In preparing this Q&A the guidance provided to the users should be read in light of the requirements included in the Fee and Expense Metrics module.
It should be noted that the INREV GAV used for the INREV TER and REER calculation might be different than an adjusted GAV used for performance measurement or other disclosure requirements. Additional adjustments could be included, or excluded, to come to an adjusted GAV to better suit a particular purpose.
The INREV GAV guidance overrides the accounting principles by making adjustments to the results arrived at by following the chosen GAAP.
INREV GAV adjustments require some material judgment by the manager. Consequently, it is important to include sufficient disclosures to allow investors to understand positions taken by the manager.
In this Q&A, direct links will be made to IFRS as a basis for calculating the required adjustments, and if needed, to other fair value concepts. If another basis of GAAP is used as a starting point, further adjustments may be required to align with IFRS for determining the INREV GAV. References to further guidance by INREV on the interpretation of fair value and provision accounting are also included.
For the use of calculating the INREV TER and REER, a vehicle GAV calculated in accordance with IFRS should be adjusted for the following items:
INREV GAV adjustment table:
|GAV per the IFRS financial statements (Total Assets)||x|
|Fair value of assets|
|a) Revaluation to fair value of investment properties||x/(x|
|b) Revaluation to fair value of self-constructed or developed investment property||x/(x)|
|c) Revaluation to fair value of investment property held for sale||x/(x)|
|d) Revaluation to fair value of property that is leased to tenants under a finance lease||x/(x)|
|e) Revaluation to fair value of real estate held as inventory||x/(x)|
|f) Revaluation to fair value of other investments in real assets||x/(x)|
|g) Recognition to fair value of indirect investments not consolidated||x/(x)|
|h) Revaluation to fair value of financial assets||x/(x)|
|i) Revaluation to fair value of construction contracts for third parties||x/(x)|
|j) Set-up costs||x/(x)|
|k) Acquisition expenses||x/(x)|
|Effects of the expected manner of settlement of sales/vehicle unwinding|
|l) Revaluation to fair value of savings of purchaser’s costs such as transfer taxes||x/(x)|
|n) Derecognition of financial derivatives||x/(x)|
|o) Derecognition of deferred tax assets||x/(x)|
Fair value of assets
a) Revaluation to fair value of investment properties
If a real estate vehicle uses the option to account for investment properties under the cost model, this adjustment represents the impact on GAV of the revaluation of the investment property to fair value under the fair value option of IAS 40.
The effect of straight-lining of lease incentives, rent guarantees, insurance claims (for damages, lost rent, etc.) should be taken into account when valuing the property at fair value in accordance with IAS 40 and SIC 15 to ensure that any asset is not double counted in the GAV.
b) Revaluation to fair value of self-constructed or developed investment property
If a real estate vehicle uses the option to account for self-constructed or developed investment property under the cost model, the adjustment represents the impact on GAV of the revaluation of the self-constructed or developed investment property to fair value under the fair value option of IAS 40.
c) Revaluation to fair value of investment property held for sale
Some investment properties may be classified as assets held for sale or as a group of assets held for sale. The carrying value of such investment properties depends on the chosen accounting treatment under IAS 40 (either fair value or cost).
The adjustment represents the impact on GAV of the revaluation of the investment property intended for sale, measured at fair value or cost, to the net realisable value (fair value less disposition costs).
d) Revaluation to fair value of property that is leased to tenants under a finance lease
Property that is leased to tenants under a finance lease is initially measured on a net investment basis and subsequently re-measured based on an amortisation pattern reflecting a constant rate of return.
The adjustment represents the impact on GAV of the revaluation of the finance lease receivable to fair value.
e) Revaluation to fair value of real estate held as inventory
Properties intended for sale and accounted for under IAS 2 (Inventory) are measured at the lower of cost or net realisable value in the financial statements. This adjustment represents the impact on the GAV of the revaluation of such properties to net realizable value (fair value less disposition costs). This adjustment should be included under the caption ‘revaluation to fair value of real estate held as inventory’.
Where the likely disposition date is more than one year from the date of the GAV computation, disposition costs should not be deducted from fair value in calculating this adjustment..
f) Revaluation to fair value of other investments in real assets
Under IAS16 other investments in real assets are normally accounted for at cost.
The adjustment represents the impact on GAV of the revaluation of other investments in real assets to fair value in accordance with the fair value assumptions under IFRS 13.
g) Recognition to fair value of indirect investments not consolidated
Indirect investments in real estate, such as investments in associations and Joint Venture ">joint ventures, have different accounting treatments and carrying values under IFRS. Such investments can be valued at cost, fair value or NAV.
The adjustment represents the impact on GAV of the recognition of indirect investments not consolidated and depending on the type of investment at fair value.
Under this adjustment, two situations can be identified:
1. Investments for which fees and costs are proportionally taken into consideration in the calculation of the fee and expense metrics
The adjustment represents the impact on GAV when including the proportional GAV of the associations and joint ventures based on the share that the vehicle holds.
In this case, all assets should be included proportionally for the share that the vehicle holds in the assets of the associations or joint venture. These assets should be valued in accordance with the guidance provided herein. All corrections should be taken into consideration and should be reflected, as applicable, when calculating the INREV GAV for the purpose of preparing the INREV TER and REER.
2. Investments for which fees and costs are not taken into consideration in the calculation of the fee and expense metrics
The adjustment represents the impact on GAV of the revaluation of indirect investments to fair value, if not yet accounted for at fair value. Reference is made to the INREV NAV guidelines, and more specifically to Q&A-4 of the INREV NAV module.
h) Revaluation to fair value of financial assets
Financial assets are generally measured at amortised cost, taking into account any impairments (when applicable). The adjustment represents the impact on GAV of the revaluation of financial assets to fair value, as determined in accordance with IFRS, if not yet accounted for at fair value.
i) Revaluation to fair value of construction contracts for third parties
Under IAS11, construction contracts for third parties are normally accounted for based on the stage of completion.
The adjustment represents the impact on GAV of the revaluation of construction contracts for third parties to fair value in accordance with the fair value principles of IFRS 13.
Adjustments to reflect the spreading of one-off costs
As described in further detail below, set-up costs and acquisition expenses should be capitalised and amortised. The rationale for these adjustments is to spread these costs over a defined period of time to smoothen the immediate impact of costs on the vehicle’s performance. Furthermore, it is a simple mechanism to spread costs between different investor groups entering or leaving the vehicle’s equity at different times. Such adjustments are taken into account in the calculation of the ratio numerator included in the Fee and Expense Metrics module.
Since the INREV GAV is primarily intended to facilitate comparability between different vehicles, the INREV approach is a simple but stable methodology where these capitalised costs are subject to an impairment test each time the GAV is calculated and therefore should always be recoverable over time.
j) Set-up costs
Under IFRS, vehicle set-up costs are charged immediately to income after the inception of a vehicle. Such costs should be capitalised and amortised over the first five years of the term of the vehicle.
The rationale for capitalising and amortising set-up costs is to better reflect the duration of the economic benefits to the vehicle. Furthermore these costs are taken into account in the calculation of the ratio numerator included in the Fee and Expense Metrics module.
When capitalising and amortising set-up costs, a possible impairment test should be taken into account every time the adjusted GAV is calculated when market circumstances change and it is not expected that the capitalised set-up costs can be recovered through the sale of units of a vehicle. For instance, when a decision is made to liquidate the vehicle or stakeholders no longer expect to recover the economic benefit of such capitalised expenses, they should be written off.
k) Acquisition expenses
Under the fair value model, acquisition expenses of an investment property are effectively charged to income when fair value is calculated at the first subsequent measurement date after acquisition. This results in the fair value of a property on subsequent fair value measurement being lower than the total purchase price of the property, all other things being equal.
Property acquisition expenses should be capitalised and amortised over the first five years after acquisition of the property.
The rationale for capitalising and amortising acquisition expenses is to better reflect the duration of the economic benefits to the vehicle of these costs. Furthermore these cost are taken into account in the calculation of the ratio numerator included in the Fee and Expense Metrics module. When capitalising and amortising acquisition costs, a possible impairment test should be taken into account each time the adjusted GAV is calculated when market circumstances change and it is not expected that the capitalised acquisition costs can be recovered through the sale of units of a vehicle. When a property is sold during the amortisation period, or is classified as held for sale, the balance of capitalised acquisition expenses of that property should be expensed.
Effects of the expected manner of settlement of sales/vehicle unwinding
l) Revaluation to fair value of savings of purchaser’s costs such as transfer taxes
Transfer taxes and purchaser’s costs which would be incurred by the purchaser when acquiring a property are generally deducted when determining the fair value of investment properties under IAS 40.
The effect of an intended sale of shares in a property-owning vehicle, rather than the property itself, should be taken into account when determining the amount of the deduction of transfer taxes and purchaser’s costs, to the extent this saving is expected to accrue to the seller when the property is sold.
The adjustment therefore represents the positive impact on the GAV of the possible reduction of the transfer taxes and purchaser’s costs for the benefit of the seller based on the expected sale of shares in the property-owning vehicle.
Disclosure should be made on how the estimate of the amount the manager expects to benefit from intended disposition strategies has been made. Reference should be made to both the current structure and prevailing market conditions.
At acquisition of an entity which is determined to be a business combination, goodwill may arise as a result of a purchase price allocation exercise. Often a major component of such goodwill in property vehicles reflects the difference between the full recognition of deferred tax, purchaser’s costs or similar items in the IFRS accounts (which does not generally take account of the likely or intended method of subsequent exit), and the economic value attributed to such items in the actual purchase price.
Except where such components of goodwill have already been written off in the GAV as determined under IFRS, they should be written off in the INREV GAV.
n) Financial derivatives
This adjustment relates to the derecognition of any financial derivatives which are reported on the asset side of the balance sheet.
This relates to all financial derivatives as interest instruments, cash flow instruments and or currency exchange instruments. The rationale is that all the expenses/charges in respect to these instruments are linked to a liability or exempted for the calculation of the ratio numerator included in the Fee and Expense Metrics module.
o) Deferred tax assets
This adjustment relates to the derecognition of any deferred tax assets which are reported on the asset side of the balance sheet. The rationale is that all the expenses/charges in respect to taxes are linked to a liability or exempted for the calculation of the ratio numerator included in the Fee and Expense Metrics module.
It may happen that some vehicles have hired employees. Related staff costs should be allocated based on the activity of the employees.
For instance, the wage and related costs of employees working on property related matters should be allocated to property expenses and therefore included in the REER.
How should fee and expense metrics be determined in case a fund manager wishes to disclose quarterly ratios?
INREV Guidelines require the computation of the fee and expense metrics on an annual basis. Fund managers may provide investors with quarterly ratios. INREV Guidelines do not propose any methodology to compute quarterly ratios.
Fund managers can indeed disclose quarterly fee and expense metrics to investors. The methodology should be consistent with the methodology used for the fee and expense metrics in the annual reports, particularly on the cost classification and computation methodology.
The quarterly metrics should be presented on a rolling four quarter basis.
The fund manager should be transparent in its reporting to investors and explain the methodology and assumptions used.
In case a fund manager discloses quarterly ratios, the fund manager is still required to disclose the annual metrics in the annual report to comply with requirements included in the fee and expense metrics.
The latest update: July 2016
The module has been updated to clarify the calculation and disclosure of key fee and expense metrics: the Total Expense Ratio (TER) and the Real Estate Expense Ratio (REER). Improvements include further clarity to the components of TER and REER together with a detailed list of allocation of fees and costs. This update is based on the joint efforts of INREV, ANREV, NCREIF and PREA towards producing global reporting standards.
We will update you as soon as we have new plans for the Fees and Expense Metrics Module.