Fees in Real Estate Syndications
Rajkumar Venkatramani M.D.
Helping doctors achieve financial freedom through real estate investing | Real Estate Investor, Physician, Entrepreneur, Best Selling Author
Knowing that there are fees associated with any big transaction is one thing, but understanding what they’re for and how they affect you and your investment partners is another. Having the fees in a commercial real estate syndication decoded alters the dynamic from feeling like the fees or those responsible for them are “out to get you,” and rather that they are important to the success of all involved.
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In this article I’ll walk you through the most common fees typically seen in a commercial real estate syndication and, together, we can walk through what each one means and what passive investors should watch out for when examining an investment opportunity.
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When exploring and comparing commercial real estate syndication deals, yes, there are always fees, but there are 3 things to consider as you sort through them:?
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No one likes hidden or surprise fees, so when the general partnership is being transparent, the fees listed are reasonable, and you still make money, that’s a win!
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The Most Common Fees In A Real Estate Syndication Investment
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It is imperative to understand why the fees on a deal exist and their purpose. With that knowledge, you can more deeply understand how a real estate syndication works and more confidently peruse through the business plan, PPM (private placement memorandum), and decide definitively if a deal aligns with your goals or not.
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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.
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Sometimes sponsors spend weeks or even months researching and underwriting deal after deal to no avail. The acquisition fee is what keeps the lights on, so to speak, and helps afford all that effort during and between deals.
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Asset Management Fee – At about 1-2% of either the projected gross income or the capital invested (sponsor’s preference), this money pays for the ongoing bookkeeping, coordination, and communication that’s required to properly manage the asset and execute on the business plan.
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Construction Management Fee – On value-add or development deals, a construction management fee of about 5-10% of the expected construction budget is necessary for managing the renovations on the property. Attentive, thorough oversight is required to ensure construction projects finish on time and within budget.
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Loan Fee – This fee compensates the sponsor for their work toward obtaining financing because getting a loan of this size takes immense effort. A loan fee is typically 1% of the total loan amount.
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Guarantor Fee – Occasionally, loans require a key partner to personally pledge assets to guarantee the loan. Typically, between 1-2% of the loan amount compensates the guarantor for their pledge and support.
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Refinance Fee – At about 1-2% of the refinanced loan amount, this fee, also called a capital event, compensates key parties for the time and energy it takes to refinance the property.
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Disposition Fee – Finally, a disposition fee is often charged to cover the costs of marketing and selling the asset once the business plan has been executed. 1-2% of the sales price of the asset ensures a smooth transition from your syndication ownership to the next party.
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How To Become A Fee-Savvy Passive Investor
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With a deep understanding of the possible fees on a deal – what they’re for and how much they may be – keep in mind that each sponsor may present varying fees (in number and by percentage) depending upon their values.
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Here at REIDOC Capital, one of our guiding values is transparency. So when we publish a proforma, the projected returns are net of fees. It’s important to us that documents are easy for our investors to understand and evaluate.
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Typically the cash-on-cash returns (quarterly disbursements) and IRR projections are net of the acquisition fee, asset management fee, disposition fee, and, if applicable, a refinance and/or guarantor fee. In general, people don’t like fees, so the fewer the better! That’s why you typically won’t see more than about 4 fees on our commercial real estate syndication deals.
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As part of your journey in getting started as a passive investor, learning about and understanding the fee structure is one more checkbox checked toward being ready to grab a seat in our next deal. If you haven’t already, make sure you join the REIDOC Investment Club today so you can begin browsing opportunities!
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Remember, I’m not a financial planner, CPA or an Attorney, so take the things you’ve learned here as inspiration for more research, an open discussion with your spouse, and food for thought as you further examine the most efficient way to move toward your lifestyle and investment goals.?
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I would love to connect with you. You can set up a call with me here. Visit my website at www.reidoccapital.com
Associate Professor at Baylor College of Medicine
2 年Very informative post. When looking through the prospectus of potential syndication opportunities, are these fees usually included in the yearly cash on cash return and the end of term return estimates? How can one find them if they are not included?