Real Estate Syndications: The Most Common Fees Charged
Sponsors can charge a variety of fees totaling north of $1,000,000 on each property they acquire. It’s very important as an investor to know what these fees are, and if what the sponsor is charging is, “fair”. There is no set rule on which fees are charged and how much they are, but there are some general rules of thumb that you will see below.
Below are the most commonly charged fees and my estimation of the market rates for each based on the many deals I review each month.
Acquisition Fee
What is it?
This fee is collected upon closing the property. Syndication sponsors put in a lot of work to source, underwrite, close, and manage large, syndicated investments. They must commit considerable money, sometimes north of $1,000,000 to put a property under contract. Sometimes things out of their control happen (Covid-19, fast-rising rates, etc.) and they will fail to close on the property, losing their earnest money in the process. The acquisition fee compensates them for their effort and the financial risk they take.
Market Rate
The typical acquisition fee is 1-3% of the purchase price with the deals I’m seeing averaging 2%. Acquisition fees are seen on almost all deals.
Pro Tip
If a sponsor sources a deal off-market, eliminating some of the competition and hopefully getting the property at a lesser price, they may charge a higher acquisition fee.
Asset Management Fee
What is it?
Once the property is closed, the sponsor must execute on the business plan. This may take 2-5 years depending on the exit strategy. Somebody on the sponsor’s team, or multiple people, will oversee the property manager, keep construction on target, and provide financial reporting to investors.
Market Rate
This fee runs 1-3% of the gross revenue of the property and as of today, Q1 2023, the average is 1.5 – 2.5%. Heavier value-add deals that require significant oversight may warrant a fee at the higher end of the range. Asset management fees are seen on almost all deals.
Loan Guarantor Fee
What is it?
Multifamily lenders require that borrowers have a net worth equal to the loan amount and maintain post-closing liquidity equal to 10% of the loan amount. Some of the loans are tens of millions of dollars and sometimes the sponsors’ net worth doesn’t qualify them for the loan. They may need to “borrow” a balance sheet and pay that high net worth individual for that.
Most loans for large multifamily syndication projects are non-recourse, meaning that if the property goes into default, the lender’s only recourse is to take the property back. They can’t chase the borrowers for their personal assets. However, there are bad boy carve outs for negligence and fraud.
Market Rate
Typically 1% of the loan amount. I see this fee on 20-40% of the deals I review.
Pro Tip
Lenders allow multiple borrowers to cumulatively qualify for the net worth requirement. Sometimes this fee is split between 2-4 different people. If an investor is lending their balance sheet to the sponsor team they are typically referred to as a “Key Principle”, or KP.
Construction Fee
What is it?
This fee may be paid to a member of the sponsor team or to a 3rd party like the property manager. This fee would be in play for development deals and for very heavy value-add deals. These types of investments carry substantial risk and there needs to be 1-2 people who have construction expertise to manage the contractors and draw requests with the lender.
Market Rate
Varies widely but can range from 5-10% of the CapEx budget. I see this type of fee on a good portion of the heavy value-add and development deals.
Refinance Fee
What is it?
Taking out large loans is a LOT of work. Lenders require an extreme amount of due diligence which is one of the reasons that I love this type of investment – experts are reviewing the deal and providing most of the capital for it. Sponsors sometimes charge a refinance fee if they refinance before the hold period is up.
Market Rate
Typically 1% of the loan amount. I see this fee on about half of the deals I review.
Pro Tip
Lenders allow multiple borrowers to cumulatively qualify for the net worth requirement. Sometimes this fee is split between 2-4 different people. If an investor is lending their balance sheet to the sponsor team they are typically referred to as a “Key Principle”, or KP.
Disposition Fee
What is it?
Marketing and selling a property is a lot of work, even when using a commercial real estate agent. Syndicators may charge a fee upon exit to help compensate for some of that work.
Market Rate
Typically 1% of the sales price. I see this fee on about half of the deals I review.