Typical Sponsor or GP Fee and example structures.

6 Replies

Hello All,

What are some typical Sponsor or GP Fee structure, how is it broken down, and what are some example structures?  Just trying to get an idea of what to look for and whats fair.  I realize they obviously bring a value and deserve a fee, just trying to wrap my head around what is the going rate?  Is it a flat $ amount fee or a percentage typically?  Also does this differ between MF syndication deals in the 50-200 unit range vs self storage vs Mobile home?  in addition, over what period of time should the sponsor fee be given out?  How do these fees effect the LP preferred return?

Thank as always, just trying to fill in knowledge gaps.

Duke

There is no typical split.  It depends on sponsor’s experience and risk profile of the project .  What I have seen: acquisition fee (0-2%), asset management fee (1-4%), pref to investor (0-10%), split from cash flow (50 to 20% for sponsor), split from sale (20-40% for sponsor).  

As you can see there is nothing typical except the names of different fees.

Sometimes last 2 fees are also based on hurdles where split % changes beyond certain results.

@Ronak Shah said it perfectly. Typically, you won't see a flat fee because that doesn't promote alignment of interest since the GP gets paid the same amount regardless of how the deal performs.

@Duke Giordano

As @Ronak Shah mentioned, there's no typical structure.

Majority charges acquisition, asset management, and disposition fees. Keep in mind there are multiple ways to calculate each fee and hence you need to read the legal documents in details to understand how each fee is derived. For instance, Acquisition fee can be based on the total raise or on the purchase price.  

In terms of the split, can be 20/80, 30/70 and etc... If the waterfall is used, then it will start at a lower split for the GP and then gradually increase based on the IRR achieved. This creates an incentive for GPs to achieve a higher IRR.

The structure differs from a deal to a deal and from a deal sponsor to another deal sponsor. So even the same sponsor may have different structures depending on a deal they are in the process to acquire. 

The fees don't impact the LP preferred returns. The sponsor get paid no matter what (in most cases). However, keep an eye on the details of the pref - not all are created equal and will be cumulative, some are not.

I recommend you read a few books on syndications to learn about it more. Start with Gene Trowbridge "it's a whole new business".

Best of luck!

@Duke Giordano

Everyone else here is correct. One thing I would point out, most sponsor and asset management fees are about keeping the lights on for the business that runs the investment. In this regard, I do see it as a necessary evil (if you want to go that far). If the sponsor can't pay bills at the office, then that will inevitably effect your returns, indirectly. 

If you develop a good relationship with the sponsor, then you'll trust them to build a sustainable investment that operates on the reality of good and bad days.

Thanks for everyone's reply, much appreciated.  I thought it would be much more clear cut on at least what people are targeting when they are analyzing deals as a LP for a typical GP cut.  Mainly looking for a guide on what is reasonable, but I can see how this can be a grey area.  I guess it can vary quite a bit.