In a multifamily syndication, the sponsor fees are the fees paid to the sponsor (also known as the general partner or GP) for managing the deal and executing the business plan. What I mean when I say “sponsor” is an individual or organization responsible for overseeing all aspects of a commercial real estate investment (e.g. JP Acquisitions). This includes identifying potential investment opportunities, conducting due diligence on those properties, underwriting the deals, crafting a business plan, arranging financing (both debt and equity), and then executing the business plan.
The fees we’ll talk about in this post compensate the sponsor for the time, expertise, and resources that are required to find, acquire, manage, and sell the property. Not all sponsors charge the same fees, however there are common fees that you will notice when sponsors send you potential deals to invest in. If you’re wondering why these fees are charged, there are multiple reasons. Real estate syndication fees are not in place just as a means for sponsors to earn more from the deal but to cover the costs associated with managing the asset. That usually includes paying for the personnel and admin costs that are necessary to ensure that investors have what they need to stay well-informed about the property’s operations and performance. It’s important to be aware that return projections are net of fees and a common misconception is that fees will reduce the expected net returns of the deal. Having no fees would be suspicious because if they were not in place, how would one expect the sponsors to keep their lights on so to speak. In many cases, sponsors earn a minority of the cash flow or even no cash flow until refinance or sale depending on the structure of the syndication. If sponsors were not incentivized by the fees, they wouldn’t be driven to make the deal perform well which acts as a conflict of interest. Another important thing to note is that prior to closing the deal and investors putting in their money, syndication firms must pay out of pocket for things such as attorney fees, earnest money, and more. It’s not hard to find a sponsor team who could tell you of a time that they got a deal under contract and were paying out of pocket for the costs associated with closing a property only to find something during the due diligence process that drastically changed the nature of the deal, but I digress.
A fair fee structure should align the sponsor’s interests with those of the investors and incentivize the sponsor to maximize the returns of the investment. Given what I’ve stated above, you can see how fees are a necessary part of a multifamily syndication. Now that you have this understanding, let’s talk about the various fees that sponsors charge.
Acquisition Fee
An acquisition fee in a multifamily syndication is a one-time fee that the sponsor charges to compensate for the time, effort, and expense of finding and acquiring the property. This fee is typically expressed as a percentage of the purchase price of the property and is paid to the sponsor at closing. More so, the acquisition fee is intended to compensate the sponsor for their work in identifying the property, negotiating the purchase price, performing due diligence, and closing the transaction. This fee is typically between 1% to 5% of the purchase price, depending on the specifics of the deal and the market conditions. As an example, if the property that you are investing in costs $1M and the sponsor is charging a 1% acquisition fee, the sponsor would raise $10,000 on top of all the closing costs, down payment, and capital expenditures. That money would go directly to the sponsor at closing. It’s important for investors to carefully review the acquisition fee so as to make sure it is reasonable. If for some reason you question the acquisition fee the sponsor is charging, you should ask them what made them choose the fee percentage and how it impacts the economics of the deal.
Asset Management Fee
An asset management fee is a fee that the sponsor charges to manage the day-to-day operations of the property. This fee is typically expressed as a percentage of gross revenues and is paid to the sponsor on an ongoing basis for the duration of the investment. The asset management fee is intended to compensate the sponsor for their work in managing the property, overseeing property management, handling leasing and tenant issues, and making decisions related to capital expenditures, repairs, and improvements. This fee is typically between 1% to 2% of gross revenues, depending on the specifics of the deal and the market conditions.
Disposition Fee
A disposition fee refers to a fee that is paid to the sponsor or general partner of the syndication when the property is sold or disposed of at the end of the investment period. This fee is typically a percentage of the sale price or net proceeds from the sale of the property and is outlined in the operating agreement of the syndication. It is meant to compensate the sponsor for their efforts in managing the property, securing the sale, and generating a return for the investors. The disposition fee is usually paid out after the investors have received their return of capital and any preferred returns or profit splits. The fee is intended to incentivize the sponsor to work diligently to achieve a profitable exit for the investors.
Refinance Fee
A refinance fee refers to a fee that is paid to the sponsor of the syndication when the property is refinanced during the investment period. The refinance fee is typically a percentage of the new loan amount or the amount of money that is pulled out of the deal. The purpose of this fee is to compensate the sponsor for their efforts in refinancing the property, negotiating new terms with lenders, and generating a return for the investors. Similar to the disposition fee, the refinance fee is usually paid out after the investors have received their return of capital and any preferred returns or profit splits. This fee incentivizes the sponsor team to work diligently so as to refinance the deal to maximize the profits.
Conclusion
Having this understanding of the common fees that sponsor groups charge investors, you’re better equipped to evaluate deal structures prior to investing. More so, it’s important to carefully review the sponsor fees and terms of any multifamily syndication before investing to ensure that you understand the costs and potential returns. Some individuals work with an experienced real estate attorney and/or financial advisor to review the deal and ensure that it aligns with their investment goals and risk tolerance. However, working with either of the professionals mentioned is not necessary and is simply a suggestion I’ve heard mentioned.
As noted previously, not all sponsors charge the same fees and thus while you may see one sponsor charge a refinance fee for example, another may choose to not charge that fee. Fee structures are most impacted by the potential returns of a deal. The more ‘meat on the bone’ (i.e. the larger the opportunity to increase the property’s value), the more likely it is that the sponsor will charge higher or additional fees.
If you have any questions regarding the terms and concepts in this post or previous ones, don’t hesitate to reach out to either me (tedi.nati@jpacq.com) or someone on our team so we can help explain what is causing the confusion. If you’re interested in investing with us at JP Acquisitions, you can contact us via email (contact@jpacq.com), LinkedIn, Instagram, or our investor portal to set up a meeting.
As always, I hope you enjoyed reading this post as much as I have writing it. Best of luck!
Connect with us!
About the Author
Tedi Nati is the Managing Partner of JP Acquisitions. In his role he is responsible for broker outreach, establishing deal flow, underwriting, marketing, and assisting in the closing process. In addition to his role at JP Acquisitions, he is an Assistant Equity Underwriter at Cinnaire, a non-profit Community Development Financial Institution (CFDI). In his role at Cinnaire, he is responsible for assisting the underwriting team in evaluating and structuring real estate equity investments and assessing the risks and mitigants associated with such. Tedi earned his Bachelor of Science in Finance from DePaul University, where he graduated Summa Cum Laude. In his free time he enjoys reading, writing for his blog (tedinvests.com), looking for multifamily deals, working out, and researching stocks.
Make sure to always do your own research before making any final decisions on buying/investing real estate, stocks, or other securities. I am not a CPA, attorney, insurance, or financial adviser and the information in this blog post shall not be construed as tax, legal, insurance, construction, engineering, health and safety, electrical or financial advice. If stocks or companies are mentioned, I sometimes have an ownership interest in them – DO NOT make buying or selling decisions based on my posts alone. If you need such advice, please contact a qualified CPA, attorney, insurance agent, contractor/electrician/engineer/etc. or financial adviser.