A Guide to Real Estate Syndication Fees
How to Know What Fees to Expect With Real Estate Syndications
You can undoubtedly remember a time when you bought a new home or a car and had to sift through mounds of paperwork that were full of legalese, fee disclosures, and caveats. Well, investing in real estate syndications is no different. There are various fees that you should be made aware of before investing in commercial real estate deals so that you can decide for yourself if any of the fees are excessive or unwarranted. It’s a prudent measure individual investors should take.
You may be thinking you want to keep your fees as low as possible, but keep in mind that these fees pay the professionals who have extensive experience and expertise such as the deal sponsor team (the real estate sponsors).
The deal sponsor team is responsible for overseeing the day-to-day operations of the property. These fees are how they are compensated for their extensive work, connections, and vast knowledge. The real estate syndicator team is integral to the success of the real estate project, and they are the reason why potential investors have these investment opportunities.
Understanding a breakdown of all of the fees and how they can affect you and the rest of the passive investors in the limited partnership will help you feel more comfortable with the investment. These real estate syndication fees are vital to the success of the investment property and to the group of investors as a whole.
I’ll discuss with you in this article the fees that are most common and typically seen in commercial real estate syndications. You’ll learn what each of these fees is and what to be looking out for when reviewing any real estate investment such as multifamily syndications.
First, we want to debunk some myths about investing in real estate syndications.
Debunking Myths Around Real Estate Syndication Deals
Sometimes with a lack of understanding of a particular concept, there can be assumptions made that are incorrect. So, we’re here to set the record straight and debunk some ideas that people may have about real estate syndications.
Myth #1 – Investors Don’t Have Control of Their Investment
The fact is you have total control over your investment with real estate syndication. While you aren’t giving input into the renovation process or handling the details of the management of the property, you have full control over which asset you invest in, which asset class you invest in, which deal sponsor you invest with, how much you invest, and which real estate market you want to invest in. The fact is you have 100% control over all aspects of real estate syndication investments.
Your “work” is done on the front end of the investment. This is the time that you want to research the market, and the sponsor team managing the project, review the investment summary, and the private placement memorandum (PPM), and conduct all of your due diligence. Then once everything checks out and you’ve decided to invest, you can sit back and relax while all of the teams that were put in place to make the syndication a success go to work on your behalf.
Myth #2 – Investors Earn Lower Returns
You might have heard that you would receive lower returns if you partake in a real estate syndication investment opportunity. However, real estate has provided better returns to investors than the stock market historically, so we’re going to debunk that myth because the evidence is there.
In fact, investors often look at only gross returns and don’t compare the actual net returns between different investments. Stock market investing, for example, has a broad range of fees that can affect your net return. Most investors don’t know the net returns they receive from their stock portfolio because the fees have a more complex structure.
So, here is what you should consider when comparing real estate syndication opportunities:
- Are the fees creating alignment between the investment and asset goals of the general and limited partners and driving performance?
- Can you still make a reasonable (projected) return on your capital that propels you toward your goals?
- Are the sponsors transparent about the fees being charged and what they’re for?
Most people don’t have the time or desire to sift through their investment portfolio to find any hidden fees, so when you do have transparency in the fee structure and the net return works for you and your investment goals, then that’s a win!
Make sure that your investment choice is based on the projected net returns and not gross returns and that you understand where all of the fees are within your investment. This will ultimately impact the passive income you receive and will affect your budget and financial goals.
The Most Common Fees In A Real Estate Syndication Investment
There are a lot of moving parts in the acquisition of a large commercial asset such as an entire apartment community. The general partner or general partnership spearheads and orchestrates all of the individuals who are integral to the success of the acquisition and management of the real estate property. Real estate investors, or any potential investors, should know how to evaluate a deal and part of that process is understanding the fee structure of real estate syndications.
With this knowledge, you can understand more fully how real estate syndications work and who is getting paid what, and for what role they are being compensated. When you are reviewing the (PPM) this understanding of the fee structure will help you decide if the sponsor team and the general partnership have an alignment of interests with you and your real estate investing goals.
Let’s dig in and discuss typical fees that you may see in real estate syndications:
Acquisition Fee – This is typically 1-3% of the purchase price of the asset and covers costs associated with the resources and due diligence performed by the sponsor to acquire the asset. There is an enormous amount of time that a sponsor team spends to find, and put together, the key players for that one deal. Deal sponsors should be compensated well for their efforts.
After all, it’s not uncommon for a project sponsor to take 3 to 6 months to find a deal that is worth acquiring. They may have to look at hundreds and hundreds of deals to find that one good opportunity that everyone can benefit from. So, it’s important that deal sponsors receive an acquisition fee for their time, effort, knowledge, and experience.
Asset Management Fee – At about 1-2% of either the projected gross income or the capital invested (sponsor’s preference), this capital is allocated to pay for such necessities as regular bookkeeping tasks as well as on-going communications between the property management team and the deal sponsors to properly manage the asset and execute the business plan.
Construction Fee (Management) – A construction management fee is typically 5-10% of the construction budget. Value-add deals are very common, so this fee would be paid out to those individuals who would be handling the oversight of and successful execution of the construction renovation plans. It is important that construction management oversight is implemented to ensure that these renovation projects finish in a timely manner and on budget.
Equity Placement Fee (Equity Origination Fee) – An advance fee charged by a broker that is paid for obtaining passive investors as part of the limited partnership and investor pool. This fee is usually around 1-2% of the capital invested.
Loan Fee – A loan fee is typically 1% of the total loan amount. This is paid to the sponsor for obtaining the loan and putting people in place that can help get such a large loan over the finish line.
Guarantor Fee (Loan Guarantee Fee) – Occasionally, loans require what is called a “key partner” to personally collateralize or pledge assets to guarantee the loan. Typically between 1-2% of the loan amount compensates the guarantor for their efforts.
Refinance Fee – At about 1-2% of the refinanced loan amount compensates those who have put in the time and energy to refinance the property. When you have been part of a refinance event in a real estate syndication, and are able to get most or all of your capital returned and remain vested in the deal, then you would probably agree that this fee is well worth it.
Disposition Fee – This fee amount is usually 1-2% of the sales price when the asset is sold to ensure a smooth transition. There is a lot of work in selling an asset as there is in acquiring an asset, and those individuals that are instrumental in making that transition happen as effortlessly as possible should be compensated accordingly.
Other Common Fees
There are other fees such as property management fees that pay the property management company for their part in the day-to-day management of the real estate syndication deal. These fees vary and are often based on performance as well.
Additionally, when the asset is offered for sale such as a multifamily apartment building, then a licensed real estate broker is hired to help sell the property. A real estate commission fee would need to be paid by the seller to the real estate broker in that instance if the property is sold. A typical real estate commission on a commercial property is between 3-8%.
How To Become A Fee-Savvy Passive Investor
The fee structure we discussed is just a gauge so that you can learn what to expect as a passive investor in real estate syndications. But every deal sponsor will likely have different structures and fee types. Beware of syndication sponsors who are charging fees that are wildly higher than the norm or sponsors who are instituting many more fees than those outlined here.
It is common to have at least 4-5 different fees in a real estate syndication.
Here at PCRP Group when we present a proforma, the projected returns are net and include the fees. Transparency is one of our guiding principles, so it’s important to us that our investors have documents that are very simple and easy to understand and analyze.
When we put out our cash-on-cash returns and IRR projections, they are net projections that take into consideration the acquisition fee, the asset management fee, the disposition fee, and a guarantor fee. We don’t like fees any more than you do, so that’s why we like to align ourselves with deal sponsors that keep fees to a minimum of around 4-5 different fees on our commercial real estate syndication opportunities that we present to our investors.
If you haven’t already, make sure you join the PCRP Passive Investor Group today so you can begin browsing these great investment opportunities we make available to our passive investors.
Until next time… Earn Passively & Live Abundantly!
Ready to Learn More?
The best way for you to learn more about commercial real estate syndications is to join the PCRP Passive Investor Club.
Through the PCRP Passive Investor Club, you’ll get a priority review of all the deals we offer. We’ll work with you to determine your investing goals and then present you with the best deals to meet those goals. We’ll then guide you every step of the way as you invest in those deals.
So if you’re ready to start investing passively in institutional-grade, commercial real estate in fast-growing, climate-resilient markets in the U.S., join the PCRP Passive Investor Club – IT’S FREE! – and get started on your path to EARN PASSIVELY and LIVE ABUNDANTLY!
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