Understanding what costs are for and how they impact you and your investment partners is one thing; recognizing what they are for and how they influence you and your investment partners is another. When the fees in a commercial real estate syndication are deciphered, the dynamic shifts from feeling like the fees or those in charge of them are “out to get you,” to feeling like they are critical to everyone’s success.
In this post, we will guide you through the most frequent fees encountered in commercial real estate syndication and, collectively, we’ll go over what they signify and what passive investors should look out for when evaluating an opportunity to invest.
What is Real Estate Syndication?
A commercial real estate syndication occurs when a real estate syndicator/sponsor (an individual, business, group of individuals, etc.) gathers together an investor pool comprising multiple individual investors and pools their funds into a deal.
This collection of investors, which includes a syndicator/sponsor known as a general investor, passive/limited investors, and other parties such as contractors, evaluators, legal professionals, and others (which vary depending on the project), all take on a venture collectively. It is frequently a significant commercial investment opportunity and is driven by the sponsor. Waterfall distribution is a method of distributing earnings according to agreed-upon shares.
The most common fees in a real estate syndication investment
There are various real estate syndication fees that the investors will face such as acquisition fee, asset management fee, and more.Here are the most common real estate syndication fees explained!
This fee pays the sponsor for their efforts in securing finance, as obtaining a loan of this scale necessitates a significant amount of effort. Typically, a loan charge is 1% of the total loan amount.
The acquisition fee
This fee is generally 1-5 percent of the asset’s purchase price, and it covers the costs of the sponsor’s efforts and due diligence in acquiring the asset.
Sponsors have been known to spend months or even years investigating and underwriting offers after the deal, only to come up empty-handed. The acquisition fee is what keeps the pressure on, so to speak, and allows all of that work to be put in during and between transactions.
Some loans will need a keep partner to directly promise assets as collateral. The guarantor is typically compensated between 1-2 percent of the loan amount for their guarantee and cooperation.
Once the business strategy has been implemented, a disposition fee is frequently paid to pay the costs of promoting and selling the asset. A flawless transfer from your syndicated ownership to the next party costs 1-2 percent of the asset’s sale price.
Asset Management Fee
An asset management fee is levied for having capital managed by a professional asset manager. The fee is calculated as a percentage of Asset Under Management (AUM), which can range from 0.10 percent to 2 percent of a property’s gross monthly income (or a portion of the property). This fee includes the expense of capital management, as well as the time, knowledge, and administration work required.
It’s important to note that asset management does not include property management. The syndicator’s job is to oversee property management and the entire functioning of the memorandum of understanding with the investors, which allows them to bill for asset management.
Some of the additional parts of services that must be supplied after collecting the asset management charge include sending out financial and legal notifications to the investor, as well as aiding with tax filings. The ultimate purpose of asset management is to optimize a property’s profit and value by minimizing risks, reducing expenses when possible, and so on.
Equity Placement Fee
An advance-fee is imposed by the broker to cover the costs of finding investors and limited partners, as well as advertising, planning, and behind-the-scenes interaction and documentation. This fee, also known as the equity origination cost, is typically 1-2 percent of the money contributed.
Construction Management Charge
For managing the improvements on the property on value-add or development projects, a construction management fee of around 5-10 percent of the projected construction budget is required. To guarantee that construction projects are completed on time and on budget, careful and extensive monitoring is essential.
This fee, also known as a capital event, is typically 1-2 percent of the refinanced loan amount and rewards important parties for the time and work it takes to refinance the property. You’ll undoubtedly agree that the refinancing charge is well worth it if you’ve ever received a portion of your investment money returned and enjoyed the delight of cash-on-cash returns as if all of your capital was still invested.
Real estate commission
It’s completely alright if you’re a licensed real estate broker or representative and want to earn a commission on the purchase or sale of the properties you wish to syndicate. You only need to tell investors about it, and the commission should be comparable to local real estate commission rates. However, if you are not a licensed real estate salesperson in your state, you will be unable to accept this fee unless you intend to obtain a license in the jurisdiction where the property is situated.
Syndicators don’t often know that they can charge fees when they delay payments or refunds for costs owing to them. Normally, this rate is set at 10%, although sponsors may choose to decrease it. Because they are worried about scaring away investors, some first-time syndicators will not charge an interest rate. Any delayed fees or management advances should be paid as soon as feasible so that investors do not have to pay the interest to the sponsor.
Anyone thinking about investing in a real estate syndication should study all of the offering memorandum in detail. This investment paperwork will spell out exactly what fees will be paid to the sponsor, how they will be dispersed, and when they will be released. The cost structure for one agreement may differ significantly from the next. Make sure the sponsor’s costs are reasonable and in accordance with industry norms.
Finally, the number of fees a sponsor charges will have an impact on the overall profitability of a deal. There will be less revenue available to repay to investors if a deal is fee-heavy.
Peoples Capital Group believes in limiting their fees to allow for stronger returns to their passive investors so we only charge an acquisition fee.