Equity as acquisition fee

9 Replies

I am hoping to get some guidance from other investors. I am about to close on my first duplex, I will be co-signing with my dad. However, I have two other investors going in on the deal with me as well. I found the deal, performed due diligence, and done all other sweat work. I am charging a flat, small, aquisition fee to the other investors just for my time. I feel like I can’t charge much because it’s my first deal I have put together. I just ran into another deal that is slightly larger and again will be bringing other investors in as well. My question, is it common, heard of, or fair to take equity in the property as an acquisition fee? How would I structure it? Any feedback is greatly appreciated.

@Taylor Colligan  - congrats! Acquisition fee or equity or....both! Deals can be structured numerous ways, it's what you and your investors agree upon. Some investors I know take 50% of the equity +an acquisition fee just for putting the deal together, just as long as it still projects the returns his investors require. 

@Jay Helms That is very helpful thank you! Now I just need to figure out how I can structure it. One last question, taking equity as an acquisition fee does not turn the deal into a syndication correct? I will be putting this property under its own LLC with all investors members in the LLC.

Originally posted by @Taylor Colligan :

@Jay Helms That is very helpful thank you! Now I just need to figure out how I can structure it. One last question, taking equity as an acquisition fee does not turn the deal into a syndication correct? I will be putting this property under its own LLC with all investors members in the LLC.

 That is a great question for your lawyer :) but the way I understand it, as long as you have an established relationship with your partners prior to the investment (and other criteria), a syndication isn't required. 

Be careful, because you are treading toward offering a securities and maybe should be doing a syndication. It doesn't matter how well you know the investors, but what their relationship/role to the business is. If they are money partners, but not doing the day to day help with operations, then you would likely need to do a syndication. If you just did the initial start up and then they will help out from here on out and have full voting rights based on their ownership, then you could likely all be partners. I would suggest talking with a securities attorney. 

@Taylor Colligan

A few questions I would ask myself:

What do you feel comfortable negotiating with your partners?  What seems reasonable and fair? 2% acquisition fee, 4% asset management fee & 20% of the profits??? (Just an idea)

I would think long and hard about the value that you are bringing to your investors and make sure that you are not selling yourself short.  I believe that the best business relationships are fair and equitable.  If either you or your investors feel like they're getting the short end of the stick going into the deal, then challenges will develop in the relationship in the short or long term.  Establishing an equitable relationship from the outset of your business relationship will set you up to work with your investors over the long term and get referrals when you deliver against the expectations you set.

All the best! RC

@Taylor Colligan

Hi Taylor

Everything in real estate, and life for that matter, is negotiable. My partner used his acquisition fee in our second and third deal to roll into equity. Be sure to involve your CPA.  Figure out what fee you want to charge, 1,2,3,4% and then figure put what the down payment is and "use the fee" as part of the down payment. Find out what percent of the fee is in relation to the down payment, and that's your equity. This is probably the easiest way.

Gino

first take @Todd Dexheimer 's advice.

second, in bigger deals than a duplex the "sponsor" (you) will get an acquisition fee and upside equity (read promote).  Some sponsors need the acq fee to run their biz and some roll it in for additional equity.

This situation is more common than you think. You'll need to sit down with an attorney and hammer out the details of the LLC that will purchase the property. A draft of the operating agreement should be sent to all parties so you can negotiate the details ahead of time. You will all have ownership and voting interest in the LLC, but you will need to work out percentages. When doing an LLC with new partners, its not uncommon to go through several drafts and the partners may want their attorney to review each draft.

Thank you everyone for your input. As a new investor it is very helpful to get advice and points of view from experience investors like yourselves. I will let you know how the deal goes, I have a lot to think about!

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