Types of Fees in a Real Estate Syndication
There is always a fee and cost when investing in a real estate syndication deal. Today I want to break down a few different fees you will encounter when investing with a General Partner (sponsor) on a real estate syndication.
You will find fees at different times of an investment. The fees are always charged and applied within the numbers of the deal, you are not coming out of pocket for these fees. For example, if profits are split 60/40, the sponsor is paying 40% of the fees, and the limited partner is paying 60%.
There are two different types of fees you will encounter in a real estate syndication: 1) Transactional and 2) Oversight.
Here are a few common Transactional Fees:
1) Acquisition: Nearly all deals will have an acquisition fee. Typically this fee is between 1-3% of the purchase price. This covers the sponsors overhead. Sponsors are typically traveling to properties, meeting brokers, meeting property managers, contractors and qualifying the deal to make sure it is a quality investment. Many times sponsors have done this for anywhere from 5-50 properties. Lots of legwork goes into finding the right asset to invest in.
2) Capital Raise: this is a funding fee usually about 1% that compensates the person who is raising funds from investors.
3) Loan Processing: Typically at 1% or less, this is sometimes already apart of the Acquisition fee. If you have had a home loan, you understand the level of work that goes into this.
4) Loan Guarantee/Loan Guarantor Fee: Non-resource loans require a qualifying individual. This usually is the sponsor or someone else acting as a key principle. Sponsors will charge this because they are taking on the risk as the guarantor. Usually this is about 1%
5) Disposition: This fee is charged when it is sold. This fee compensates the sponsor when facilitating the sale. Disposition fees are usually 1-2% of the sales price. This is paid for from sales proceeds and again does not come out of the pocket of the limited partner.
Common Oversight Fees:
1) Property Management: Due to complexity of commercial real estate, it is not easy to manage it yourself. Typically your sponsor is hiring a professional 3rd party property manager. Property managers charge a % based on gross income. Always ask sponsors if they are managing the property themselves, or if they are hiring a 3rd party. These fees should always be 100% transparent before you enter a deal.
2) Construction Management: Some sponsors may charge a fee for the construction management during a deal. Always ask your sponsor if there is a construction management fee and what it is. Typically this fee is below 10%.
3) Asset Management: This fee pays for the asset management team, accounting, admin, and investor reporting. This could be an entire blog in itself. We will dig deeper into this at another time.
These are some common fees you will see when analyzing deals. Be sure to ask your sponsor about any of these you would like deeper clarity on, and make sure fees are listed upfront. Again, these do not come out of the pocket of the investor. Projections are made with these fees already in mind. The returns should be after all fees are paid.