A few questions about how the returns get disbursed in a syndicated MF deal...
1. I've seen that the asset management fee is typically 1-3%....of what? The gross rents? The rents that are collected?
2. Is asset management fee taken out before or after the passive investors' preferred returns?
Thanks for the help!
@Jeremy Porto the easy one to answer is #2. The asset management fee is paid before cash flows to the waterfall.
#1 is more difficult to answer because the dirty secret in the syndication business is that asset management fees are almost always described as “1%” but the similarities stop there.
The method I use is 1% of gross collected income. This is the same way property managers calculate their management fees.
But I also see 1% of the capital raised, 1% of the total of debt plus equity, and 1% of the property value (typically determined by a cap rate specified in the calculation in the operating agreement).
Using any of these methods would result in an asset management fee far higher than using 1% of gross collected income, yet the sponsor will still say “1% asset management fee”. An investor that isn’t paying attention and is comparing one offering to another might completely overlook the fact that the asset management fees are actually vastly different.
Great answer Brian and as usual, candid and insightful. That is the “When ‘1% isn’t 1%’ Rule”
@Brian Burke Thanks for the answer! Well described!
@Jeremy Porto I couldn't have explained it better than the PRO like @Brian Burke . I want to add that you should always ask about this and other syndication fees as most have more than one fee (including but not limited to acquisition and disposition fees). Every deal is different and so are the type of fees charged and the amounts. Also, all of these fees must be disclosed in the legal document (PPM = private placement memorandum) shared with the investors that are signing up for the investment.
If you'd like more clarification, feel free to PM me.
Best of luck!
@Jeremy Porto both answers are it depends on what you want to do. Some companies take fees regardless of performance and others are performance based. I understand both sides of the coin. I think best practice, especially for companies that are young (less than 10 years old), is to be performance based. This allows the investors to feel like you have their interests first. Well established companies that have decades worth of proven track record can do things differently.
@Todd Dexheimer , good point! Get more trust out of your investors first by being performance based and then when you're more experienced, everyone will expect a certain level of service and will be more comfortable with something different. THank you!
@Jeremy Porto there are benefits to investors for having a reasonable asset management fee. One example is in the case that the issuer is no longer the manager of the syndication. Without an asset management fee in place (and corresponding language in the operating/company agreement) there is no incentive for another person or entity to take the reigns and see the project through.
Another important consideration is the probability that revenue does not meet and exceed the preferred return, in which case the issuer/manager would not receive a cash flow - this can lead to reduced effort and mismanagement of the assets.
Performance based structures are typically reflected in the waterfall and promote investor confidence, but a reasonable management fee can be an overall good thing for a project.