How many fees and what types of fees do real estate syndicates usually charge? What types of hidden fees are common in this space? In this episode, Aaron reviews about a dozen different fees that real estate operators can charge to their passive investors. You want to make sure these fees align with all parties and that your hard-earned capital is not being siphoned off from too many fees. Be aware of the common fees out there so you are educated when it comes to selecting the right real estate syndicate for your investment goals. Also, learn how to avoid teaming up with syndicators that charge outlandish fees in this episode of the Passive Cash Flow Podcast.
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Aaron Fragnito: There’s a number of fees people or operators can charge when running a real estate syndication. You want to really keep an eye out for what fees the property management company is charging, the real estate operators are charging. You want to understand is it fair? Are they based on performance? Are they industry-standard, and are they going to eat away your profits?
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Hello, ladies and gentlemen, it’s Aaron Fragnito, with the Passive Cash Flow Podcast. Welcome back for another episode, I’m glad you could join us. Today we’re going to talk about real estate syndication fees. There’s many real estate syndicators out there. We charge all different fees. We do need to put food on our plate. It’s a lot of work behind the scenes to make these opportunities available to our passive investor group and to make sure they run properly, and our projects are on cue. However, you want to understand what you’re paying for, what you’re getting, and also other fees that syndicators may slip into the mix that you want to be aware of and make sure if they’re fair or not when investing your hard-earned capital in a real estate syndicate. Let’s get started today and we’ll talk about real estate syndication fees.
The first fee I’m going to talk about is a loan charge. Now, Peoples Capital Group does not charge this fee, but this is a fee that’s paid to a sponsor. Okay, sponsor is the operator, the general partner, the person putting together the opportunity and running the opportunity. This sponsor would charge generally, maybe 1% of the loan fee, and that’s the costs for obtaining the loan. Generally, these are multimillion dollar loans, and there is a lot of work behind the scenes to build these relationships with banks and close out a loan, and make sure they get all the proper documentation so that the loan can close effectively on the closing date per contract. However, I don’t understand, as far charging a loan charge because in my opinion, it’s just part of the process of putting together a real estate syndicate.
Now, the next fee, the acquisition fee is something here at Peoples Capital Group we do charge because there is an enormous amount of work behind the scenes to vet hundreds of properties and bring our investors one well, vetted opportunity. An acquisition fee is there to help the investor, the operators find the opportunity, market out to find the opportunity, complete the due diligence on the asset. Now, remember when we bring an opportunity, a well vetted asset to our investor group, it’s not the only property we’ve done due diligence on, right? We may pay for due diligence on other properties.
We try to avoid doing that until we’re more seriously under contract, but there’s a process and a cost to finding the opportunity, whether that’s marketing to landlords or brokers, or completing due diligence on a bunch of bad deals to find a good deal for our investor group. That acquisition fee tends to be a reimbursement of that cost because by the time we get to a closing table, sometimes we’ll have put in a year or two of work. There tends to be about 1% to 5% of the asset purchase price and that here at Peoples Capital Group is a fee we charge, but we really try to keep our fees low.
We only charge an acquisition free fee and our property management company charges a property management fee which would have to of course be paid regardless to a property management company, so that’s really not even a syndication fee. However, the acquisition fee is a fee that we charge here at Peoples Capital Group and we want to be completely transparent in those fees that we charge. When you’re looking around for a syndicate or a syndicator to invest in, make sure you understand what their fees are.
Another fee that we don’t charge here but I have seen is a guarantor fee. This is a fee to guarantee the loan. Okay, when attaining these loans, a lot of times the banks require the operators to personally guarantee the debt. Seth and I don’t like doing this, but sometimes we have to do it and we always do it if it’s necessary. It helps us get a better term on the mortgage, it helps us keep our closing costs lower, helps us lower our interest rates often as well. However, we don’t charge a guarantor fee. That can be up to 1% to 2% of the loan amount. Keep an eye out for that fee and you can decide if that’s something fair in the project that you’re investing in, the syndicator you’re investing in.
Here’s a disposition fee, so that’s a fee of selling the property. Again, that could be 1% to 2% of the asset sale price. This is not a fee we charge at Peoples Capital Group, but if you’re investing in a group that their plan is to buy, renovate and sell a property, do they have a disposition fee and how much is that? Is it paid if you don’t get the target price for your asset, right? A lot of these fees you want to say, “Okay, fine, I’m okay paying a 2% of the sale price or 1% of the sale price, but you need to get X amount on the sale of the property,” right? Maybe if you get even a higher amount than it’s 2%, if you get a lower amount, it’s 1%. Understand when these fees are due. Is there a performance regulation that’s required for the operator to achieve or to earn a fee?
There really should be, right? There should be a bar they have to close on the property. Okay. That’s an acquisition fee, right? Disposition fee. Well, what’s the sale price of the property, right? If you’re selling at 10% or 20% below the targeted sale price, then the operator should not get a disposition fee, in my opinion. In fact, quite frankly, a disposition fee doesn’t make sense to me because at a disposition you’re all earning a profit upon the sale of the property, and we believe that the operators should get paid through their equity position, which is more of a win-win scenario. That’s what we have structured here at Peoples Capital Group, not a fee-based structure, but an equity-based structure where we earn most of our income through the equity ownership properties so it’s a win-win for everyone.
Here’s another common fee. This is the most common fee that you’ll see, is an asset management fee. Okay, now this is not to be mixed up with a property management fee. Okay, that property management is a service that any owner’s going to need to hire for large scale properties. We own our own management company, so we do have a property management company that charges a fee to the LLC that owns the property. However, we charge about two thirds a year average property management fee.
That’s not that fee I’m talking about right now. Asset management fee is actually a fee based on the total amount of funds raised often. Or let’s say I were to raise a million dollars and buy a $3 million apartment building and my asset management fee is 2%. That means I would get 2% of the million dollars I raised, maybe that’s paid to me on an annual basis. Maybe it doesn’t matter if the property’s performing or not. I still get paid that fee. That’s not quite fair, I don’t believe in that structure, but you’ll see that out there. This is a very common fee to find in most real estate syndicates, real estate syndications.
It’s an AUM assets under management, is often what it’s referred to. It can go anywhere from 0.1% to 2%, and it often is paid no matter what the performance of the investment is. Keep an eye out for that, make sure it’s not a fee that’s going to eat away at your profit, and make sure it’s a fee that is only paid when the asset’s performing. Okay, if the asset’s performing, you’re earning your agreed return, then perhaps an asset management fee is fair but, in my opinion, it should only be paid if the asset is performing as targeted.
Here’s another type of fee to watch out for; an equity placement fee. Okay, this is the cost of finding the investors, the limited partners putting together the private investors here, the advertising, the planning, the behind-the-scenes interaction, the documentation, basically my job, and putting together those investors, making them comfortable over the investment opportunity with the operators, understanding how their payouts supposed to be and what the experience will be for those private investors, and what passive investing truly is.
In this case, that’s called equity placement fee. That’s a generally 1% to 2% of the money raised through that process, similar to an equity origination cost or something like that. That’s what it can also be called; an equity origination fee. Now of course, at Peoples Capital Group we do not charge that fee.
Here’s another one, construction management charge. This is the management of the construction. This can be 5% to 10% of the project cost. Now, I don’t really like this fee because here’s the problem with it. If you get paid 5% to 10% of your project cost and your project doubles in cost, well, your fee doubles. It does not make sense to have a project management fee based on the amount of your money that they’re spending, right? There’s a budget we want to stick to. A construction management charge should be lowered if the construction budget goes over the agreed budget.
Really, the construction management charge should be based on performance. Of course, managing construction is a full-time job, it’s a very important job. You want to make sure you have someone in place that’s very reliable and experienced with construction management, and a good crew in place, and they should be paid for their time. However, it should be based on the production of the project, the completion of the project. There should be different sections of the project and as each is completed, a fee will be paid. That’s how we tend to pay our construction managers. There’s different steps to the project. Once each step is completed, the proper fee is paid. Of course, you want to pay your contractors quickly so they show up and do their work quickly and effectively.
Here’s two more charges here, so we have the refinance charge. This is generally 1% to 2% of the new loan amount. Peoples Capital Groups does not charge a refinance charge. We do believe in the refinance strategy. Keep an eye out for this fee. It can be well earned. A refinance is a lot of work. You tend to have to reposition and renovate a property, and get it up in working order, and rent it for top dollar, and everything needs to work and be up to code. Then you can refinance for as much as you possibly can ideally, but getting there is a lot of work. It is similar to a disposition fee. A refinance charge is an exiting scenario for many Investors, and that’s when the fee is paid to the operators in that case.
Then you have your Real Estate commission. Hiring brokers to sell properties, working with brokers to buy properties. We pay brokers all the time to buy and sell properties. Right now, we’re buying a big property in Rowe, New Jersey. We’re paying a realtor commission there. We’re buying another property in Patterson where, again, a realtor’s earning a commission. We’re selling a property in Berkeley Heights, New Jersey. We hired a Realtor Group, a brokerage to do that, and they’re worth their weight. They brought a solid buyer at a really good price.
Real estate commissions could be well earned. They’re paid at closing. A pretty common fee, we’re pretty familiar with a real estate commission if we bought a sold home before and worked with a realtor. Some realtors are great, others are not worth their commission. Make sure you’re working with the right realtor to buy or sell a property, and they will earn their commission. I always work with realtors to buy or sell properties, but I only work with select agents. You want to make sure you’re working with the cream of the crop when it comes to real estate agents so they earn that commission.
Then of course you have interest fees. These are charges that are not paid or delayed payments to the operators, and they can earn interest on money that’s owed to them. Say fees are owed to them no matter how the property performs, which is not a smart setup, and then course, the fees can’t be paid to them. Interest will be earned on those fees owed to those operators. You want to understand what are those interest fees? If fees cannot be paid to operators, what type of interest accrues there? You want to make sure that’s a fair amount, if any. Of course, at Peoples Capital Group we don’t believe in that either.
In conclusion, there’s a number of fees operators can charge when running a Real Estate Syndication, you want to really keep an eye out for what fees the property management company is charging, the real estate operators are charging. You want to understand is it fair? Are they based on performance? Are they industry-standard? Are they going to eat away at your profits? Does the operator get paid first, or does the operator get paid last or when everyone else is getting paid, right? Does the operator need to perform to put food on his plate or does he get paid no matter how the asset performs?
You want to make sure your interests align. You want to make sure you’re ideally going to get those targeted returns. Listen, and it’s okay for your operator to do well. Right? You might want to have a structure where the operator makes a tiny bit if the asset does target, but if it does 20% or 30% better than targeted, the operator gets the majority of those returns, right? That might make sense because you’re getting a good return up front on your investments. I’m not saying operators don’t work hard and don’t deserve the fees they charge and the monies they earn, but it is extremely important whenever investing in a syndicate, to understand the fees, to make sure they’re aligned with everyone’s interests, and also make sure that at the end of the day, you’re going to be able to hit your target of return without the fees getting in the way of that.
Ladies and gentlemen, hopefully you enjoyed our presentation today, our Podcast about Real Estate Syndication Fees. We come out with a new podcast almost every week at Peoples Capital Group here at the Passive Cash Flow Podcast. Of course, hopefully you’re on our website, Peoplescapitalgroup.com, or maybe you found us on YouTube or a number of other platforms out there. If you have, please subscribe, please follow us and go to Peoplescapitalgroup.com and you can learn more about this topic and many others involving real estate investments and how people can get passively invested in real estate, and how Peoples Capital Group has helped people passively invest in real estate for over a decade now.
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