Syndication Series #005 – Real Estate Syndication Fees Explained

In our last syndication series article, we explored how real estate sponsors make money by splitting profits with investors. Here, we’ll discuss the other way syndicators earn income — fees. Fees vary widely from deal to deal, both in type and amount. Here you’ll learn how to evaluate some of the most common real estate syndication fees.

If you’re just getting started, check out Syndication Series #001: What Is a Real Estate Syndication?

Acquisition Fee

Many real estate sponsors charge a one-time fee when the purchase of the property closes. The acquisition fee compensates the sponsor for finding the property, conducting due diligence, and preparing the offering for investors.

A typical acquisition fee is 1-5% of the purchase price of the property. Smaller syndications might charge a higher percentage to make up for the relatively lower purchase price.

For example, a syndication buying a $1 million property might charge a 3% acquisition fee, resulting in a $30k fee. On the other hand, a larger syndication purchasing a $20 million apartment complex may charge just 1%, yielding a total fee of $200k.

Side note: Many syndications also reimburse the sponsor for out-of-pocket startup costs (like legal fees) upon the acquisition of the property.

Loan Guarantee Fee

Lenders often require a high-net-worth guarantor to sign the loan documents. A guarantor agrees to pay back the loan if the syndication can’t. To compensate the guarantor for the risk, syndications sometimes pay a loan guarantee fee of up to 1% of the loan amount.

Asset Management Fee

Sponsors typically charge an ongoing asset management fee over the life of the investment. The asset management fee is meant to keep the lights on — it covers overhead, accounting expenses, and general oversight of the investment.

Asset management fees are often 1-2% — but 1-2% of what?

Syndications vary widely in what they use as the basis of the asset management fee, which can significantly affect the total fee.

Examples of asset management fees include:

1% of total income collected (lower fee)
1% of capital invested (middle fee)
1% of the property value (higher fee)

Make sure to carefully read the syndication’s operating agreement and private placement memorandum to learn how the management fee is calculated. If you’re not sure, ask the sponsor. While an asset management fee based on the total property value isn’t necessarily wrong, you need to know what you’re getting yourself into.

Property Management Fee

Managing an apartment building isn’t for the faint of heart. Most syndications hire a property management company to take care of day-to-day leasing, maintenance, and tenant interaction.

Many sponsors hire a third-party property management company. Others have in-house property management divisions. If the sponsor has its own property management company, it might charge the syndication directly. Property management fees can range anywhere from 3-10% of income collected, with lower fees for more units managed.

Note that a sponsor changing a property management fee isn’t necessarily worse for investors. It just means the sponsor is earning the fee instead of a third party. Some investors actually prefer sponsors with in-house property management companies because it aligns everyone’s incentives.

Construction Management Fee

Many syndications add value by improving the property. Some sponsors charge a construction management (or development) fee to oversee large-scale renovations, construction, or demolition. Construction management fees can range anywhere from 3-10% of the cost of the capital expenditures.

Disposition Fee

Some sponsors charge a fee when they sell or refinance the property. Disposition fees are often 1-2% of the sale price.

Sponsors who take a disposition fee argue that it takes work to sell a building and they should be compensated for the effort. On the other hand, if the syndication was successful, the sponsor should be receiving a share of the profits upon the property’s sale or refinance.

What Fees Are Reasonable in a Real Estate Syndication?

Some individuals only invest in syndications with the lowest possible fees. However, fees are designed to keep the lights on and compensate the sponsor before the profit split kicks in. Without fees, the sponsor may not be able to pay its employees or incentivize deal-finding.

Let’s look at some examples of fee structures.

Example 1

Acquisition fee: 2% of the value of the property
Asset management fee: 2% of invested capital
Property management fee: 5% of revenue

Example 1 is pretty reasonable. It has a middle-of-the-road acquisition fee. Its asset management fee is perhaps slightly on the higher side, but it’s not outrageous. Remember, using invested capital as the baseline results in a higher fee than using revenue, but a lower fee than the property value.

The 5% property management fee is also reasonable — here the sponsor has an in-house property management company to take care of leasing, maintenance, and tenant interaction.

Example 2

Acquisition fee: 1% of the value of the property
Asset management fee: 0.5% of revenue

Example 2 might seem attractive at first. However, the fees are so low that the sponsor might not be able to stay in business if it doesn’t have other sources of income. Because there’s no property management fee, we can assume the sponsor is hiring a third-party property manager.

Example 3

Acquisition fee: 5% of the value of the property
Loan guarantee fee 2% of the loan value
Asset management fee: 3% of the value of the property
Property management fee: 11% of revenue
Disposition fee: 3% of the sale price

Of course we needed an example with outrageous fees. It’s fun! Here, the fees are off-market and objectively unreasonable. Fees like these will erode your profits and make you sad. Best to avoid such terms.

Have Questions About Real Estate Syndications?

If you’re interested in learning more about real estate syndications, feel free to reach out. I’m always happy to talk about real estate!