What You Should Know About Sponsor Fees in Private Real Estate Investment

Charging fees is critical for an investment manager to hire and retain the best talent and afford the best technology. It is critical for LPs to get a gauge on what is appropriate when it comes to fees.

Superior investment opportunities require a sophisticated investment firm as the sponsor to source and execute. Many investment firms employ similar strategies. But the caliber of their investment offerings is typically dictated by the team's strength and technology.

Here is a list of some of the fees you might incur when investing alongside a sponsor.?

Transactional Fees

Common:

• Acquisition Fee

Uncommon (If Paid To Sponsor):

• Debt Placement Fee
• Equity Placement Fee
• Loan Guaranty Fee
• Disposition Fee
• Refinancing Fee

Acquisition Fee: Usually between 1%-2% of the purchase price. Most often, the percentage amount decreases as the purchase price increases. Also dependent on how many other parties are involved and getting paid from the transaction (broker, equity placement, etc.).

This fee is paid at the time the property is acquired.

Debt Placement Fee:?This is a fee paid for sourcing debt and is typically between 0.5%-1.0% of the total loan amount. Sometimes sponsors will have in-house capital markets teams responsible for sourcing debt.

But most often, this is paid to a third-party mortgage broker that understands the capital markets and different lenders and can source the most favorable terms.

If not done by an in-house capital markets team, some sponsors may try to layer on an additional internal fee between 0.25%-0.75% of the total loan amount. This is uncommon if you see this.

Equity Placement Fee:?Paid to an internal or external person/team who raises equity for the deal. Often around 2%-3% of the equity raised. This fee is uncommon in syndications but relatively common in single check LP investments where an intermediary introduces the GP & LP.

Loan Guarantee Fee:?This fee is uncommon. This fee is paid to the guarantor of a loan. Typically between 1.0%-3.0% of the total loan amount is based on the risk. Typically a GP should provide any loan guarantees as part of their "promote" or "incentive fee." However, if an additional loan guarantor is needed to secure financing, there will be a fee for this.

Disposition Fee:?Some sponsors may charge a fee for arranging the sale of a building. This may range from 0.5%-1.0% of the sale price. Most sponsors do not charge this fee, but if you see it, at least you have a gauge now on if the fee is "market."

Refinancing Fee: This is similar to the debt placement fee. A sponsor may charge between 0.25%-1.00% of the total loan amount for arranging a refinance.

Again, uncommon to pay to a sponsor a refinancing fee. This is part of their job, and they're already getting paid an acquisition fee, asset management fee, and incentive fee. It's especially uncommon if there is also a debt intermediary also earning a fee.

Ongoing Management Fees

These are all common fees you will see paid to a sponsor, property management company, or leasing company/brokerage:

• Asset Management Fee
• Admin / Organizational Costs/Fees
• Property Management Fees

Asset Management Fee:?Pays for investment management services. They are sometimes charged as a percent of the total equity invested annually. Sometimes charged as a percent of effective gross income. Typically 0.5%-1.0% of equity or 1.0%-2.0% of Effective Gross Income

Admin / Organizational Fee:?Managers incur organizational costs that will pass through to the investment entity. Some of these costs include legal, marketing, technology, investor relations, and entity formation.?

Note:?Fees vary here*?

Property Management Fee:?Pays for management of day-to-day operations of a property and ranges from 2.0%-5.0% of a property's effective gross income (EGI). It can go to the sponsor if they have an in-house property management team or it is paid to a 3rd party property management firm.

Leasing Fee/Commission:?This is the commission that a leasing agent receives for leasing the property. This function may be outsourced to a third party or done in-house.

Construction Management Fee: Specific to development/renovation deals. The total fee between the GC and sponsor should be 3.0%-10.0% of total construction costs Lookout for sponsors using an outside GC charging cost + 10% and then the sponsor adding on another 10% for themselves.

Incentive Fee (Also referred to as "Performance Fee" or "Promote")

Incentive Fee:?In an incentive fee structure, the manager receives a disproportionate amount of the total profit relative to their initial investment if the deal outperforms certain return hurdles.

These hurdles usually are defined as specific IRR, Equity Multiple, or Preferred Returns that the Limited Partners must receive before excess profit is split.

Broadly Speaking.

Market Terms Here Are:?

Institutional, One Check LP, Value Add Deal:?

• 8% preferred return?
• Return of Capital?
• 80% LP / 20% GP Split?

Syndication, Value Add:?

• 8% preferred return?
• Return of Capital?
• 80% LP / 20% GP Split Until 12% IRR?
• 70% LP / 30% GP Split Until 15% IRR?
• 50% LP / 50% GP Above 15% IRR

For Core and Core-Plus risk profile deals, anticipate a lower preferred return (6.0%) with similar GP/LP splits after the preferred return is paid. Core and Core-Plus investments have lower risk, so their returns are lower. That is why the preferred return threshold is also lower.

I could write a whole LinkedIn article on the nuances of promotes and incentive fees.

What are catch-ups?

When you should expect to see fee structures deviate from the above.

Broadly speaking, though, the more the GP is doing to add value, the larger share of the economics they will receive.

Total dollars to a GP are somewhat factored in with incentive fees/promotes.

That is why the incentive fee is a lower percentage of the profits on a large $100M equity raise with an institutional investor. That fee is a $10M+ number on a successful deal.

Net returns to LPs also play a role. If an LP believes strongly they will see a suitable return for the risk on conservative underwriting, the GP will be more likely to get a more significant economic cut.

Caution, LPs here...

These returns aren't guaranteed, so we're trading hypothetical returns for a bigger actual share of profits.

Lastly, just a reminder, it is extremely rare for a sponsor to charge every single one of the above mentioned fees. This was meant to be an exhaustive list and explanations. Fees will be outlined in the Operating Agreement, Private Placement Memorandum (PPM), or Offering Memorandum (OM).

Curious about your thoughts on all of this, please share them in the comments section below!

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(This content originally appeared on my Twitter)

Breneman Capital