Syndication associated fees

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Syndication associated fees

Jack S.
Rental Property Investor · Bay Area, CA · Member since 2022 · 14 posts · 12 votes

I am interested in investing for the first time with a syndication deal that is offering equity multiple of 2-2.3x, CoC 5-6%, IRR 16%, 5 year term, but I'm a little hung up on all the fees associated with it: an acquisition fee of Two Percent (2.0%) of the purchase price upon closing of the Property, (ii) an ongoing asset management fee of Two Percent (2.0%) of estimated gross income to be paid monthly during Company ownership of the Property, (iii) a construction fee equal to Five Percent (5.0%) of the rehabilitation budget of the Property, (iv) a disposition fee of One Percent (1.0%) of the sales price upon sale of the Property, (v) a guarantor fee of One Percent (1.0%) of the purchase price upon closing of the property, and (vi) a $20,000 marketing fee to be paid at closing.


I was wondering if I were to put 100k into this deal how much actual ROI I would see after all the fees are accounted for? Also are there any reliable syndication calculators or spreadsheets that I can use in the future?

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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
3y

@Jack S., I wrote a whole chapter on fees in  The Hands-Off Investor, but the quicker answer is that some of these fees are a bit on the high side.  The asset management fee is usually the most opaque fee because there are so many different ways to calculate it.  2% of gross income is double what I most often see, and it’s usually of actual gross income not estimated gross income.  Guarantor fees are most often a percentage of the loan amount, not purchase price, so this one is above market.  Disposition fees are still pretty common but are falling out of favor.  The rest of these fees seem fairly typical.

The fees are also related to the promote (profit splits).  Some sponsors charge higher fees and a lower promote, others may opt for lower fees and a higher promote.  For example, one common trick is for the sponsor to offer an 8% pref followed by an 80/20 split in an effort to attract investors who avoid 70/30 or 60/40 splits, but then charge an asset management fee of 1% of the asset value. Depending on how the investment performs, that structure could be way worse for the investor than the higher sponsor split with a 1% asset management fee based on gross income.

If you want to know how your $100K investment will perform, look at the package that the sponsor gave you. If it isn’t abundantly clear, you are investing with the wrong sponsor.  They should be showing you performance projections with the fees baked in.  If they show you projections without reflecting the fees, that’s a problem. 

Now whether those projections are believable or achievable is a whole other discussion.

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  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    3y

    @Jack S., I wrote a whole chapter on fees in  The Hands-Off Investor, but the quicker answer is that some of these fees are a bit on the high side.  The asset management fee is usually the most opaque fee because there are so many different ways to calculate it.  2% of gross income is double what I most often see, and it’s usually of actual gross income not estimated gross income.  Guarantor fees are most often a percentage of the loan amount, not purchase price, so this one is above market.  Disposition fees are still pretty common but are falling out of favor.  The rest of these fees seem fairly typical.

    The fees are also related to the promote (profit splits).  Some sponsors charge higher fees and a lower promote, others may opt for lower fees and a higher promote.  For example, one common trick is for the sponsor to offer an 8% pref followed by an 80/20 split in an effort to attract investors who avoid 70/30 or 60/40 splits, but then charge an asset management fee of 1% of the asset value. Depending on how the investment performs, that structure could be way worse for the investor than the higher sponsor split with a 1% asset management fee based on gross income.

    If you want to know how your $100K investment will perform, look at the package that the sponsor gave you. If it isn’t abundantly clear, you are investing with the wrong sponsor.  They should be showing you performance projections with the fees baked in.  If they show you projections without reflecting the fees, that’s a problem. 

    Now whether those projections are believable or achievable is a whole other discussion.

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  • Jack S.
    OP
    Rental Property Investor · Bay Area, CA · Member since 2022 · 14 posts · 12 votes
    3y
    Quote from @Brian Burke:

    @Jack S., I wrote a whole chapter on fees in  The Hands-Off Investor, but the quicker answer is that some of these fees are a bit on the high side.  The asset management fee is usually the most opaque fee because there are so many different ways to calculate it.  2% of gross income is double what I most often see, and it’s usually of actual gross income not estimated gross income.  Guarantor fees are most often a percentage of the loan amount, not purchase price, so this one is above market.  Disposition fees are still pretty common but are falling out of favor.  The rest of these fees seem fairly typical.

    The fees are also related to the promote (profit splits).  Some sponsors charge higher fees and a lower promote, others may opt for lower fees and a higher promote.  For example, one common trick is for the sponsor to offer an 8% pref followed by an 80/20 split in an effort to attract investors who avoid 70/30 or 60/40 splits, but then charge an asset management fee of 1% of the asset value. Depending on how the investment performs, that structure could be way worse for the investor than the higher sponsor split with a 1% asset management fee based on gross income.

    If you want to know how your $100K investment will perform, look at the package that the sponsor gave you. If it isn’t abundantly clear, you are investing with the wrong sponsor.  They should be showing you performance projections with the fees baked in.  If they show you projections without reflecting the fees, that’s a problem. 

    Now whether those projections are believable or achievable is a whole other discussion.


    Thank you for the response Brian. I have been reading your book and it's a source full of useful information. I clarified with the sponsor and the projection gain is after all the fees.

    1Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    3y
    Quote from @Jack S.:
    Quote from @Brian Burke:

    @Jack S., I wrote a whole chapter on fees in  The Hands-Off Investor, but the quicker answer is that some of these fees are a bit on the high side.  The asset management fee is usually the most opaque fee because there are so many different ways to calculate it.  2% of gross income is double what I most often see, and it’s usually of actual gross income not estimated gross income.  Guarantor fees are most often a percentage of the loan amount, not purchase price, so this one is above market.  Disposition fees are still pretty common but are falling out of favor.  The rest of these fees seem fairly typical.

    The fees are also related to the promote (profit splits).  Some sponsors charge higher fees and a lower promote, others may opt for lower fees and a higher promote.  For example, one common trick is for the sponsor to offer an 8% pref followed by an 80/20 split in an effort to attract investors who avoid 70/30 or 60/40 splits, but then charge an asset management fee of 1% of the asset value. Depending on how the investment performs, that structure could be way worse for the investor than the higher sponsor split with a 1% asset management fee based on gross income.

    If you want to know how your $100K investment will perform, look at the package that the sponsor gave you. If it isn’t abundantly clear, you are investing with the wrong sponsor.  They should be showing you performance projections with the fees baked in.  If they show you projections without reflecting the fees, that’s a problem. 

    Now whether those projections are believable or achievable is a whole other discussion.


    Thank you for the response Brian. I have been reading your book and it's a source full of useful information. I clarified with the sponsor and the projection gain is after all the fees.


     This is what I was going to say. Typically the proforma projections that are provided by the sponsor are going to be net of all fees.  In other words, what you see in the projections is factoring in all of the fees from the deal.

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  • Christine Bellish
    Investor · Garwood, NJ · Member since 2018 · 66 posts · 66 votes
    3y

    Hey Jack - honestly that seems like a lot of fees, and I don't love when sponsors charge acquisition fees because it means they're getting paid before they make investors a dime, but if this is a team you've vetted and they have a solid track record of performance, whatever they are getting paid doesn't matter so much as long as you are confident you will get paid the returns they are projecting.


    Generally I understand the construction fee or developer fee because there are many costs that are paid out of pocket up front before sponsors even market the deal to investors and they need a way to recoup that, but charging acquisition and construction and guarantor seems like a lot....although, again, who really cares what they're getting paid as long as you get paid what they're projecting.

    Also, don't love the asset management fee taken as a percentage of the estimated gross income - personally think that should be of gross collected (actual) rents.

    Regardless, like the others who already responded mentioned, the projected returns are usually calculated after the fees are already taken into consideration, and if you are happy with those projections and they meet your investing goals then that's what matters most!

    1Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    @Jack S.

    As mentioned that’s net. Questions I would ask are what is the exit strategy?

    Also check others to see if those fees are online. A 16% IRR in todays environment with those fees seems very high or high risk.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    3y
    Quote from @Chris Seveney:

    @Jack S.

    As mentioned that’s net. Questions I would ask are what is the exit strategy?

    Also check others to see if those fees are online. A 16% IRR in todays environment with those fees seems very high or high risk.

    Exactly. If this is a multifamily value add, they're being aggressive somewhere.

    This is what I'd verify first:

    * Proforma rent growth

    * Natural annual rent growth

    * Expense ratio

    * Absorption rates

    Something is likely off.

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  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    3y
    Quote from @J Scott:
     Exactly. If this is a multifamily value add, they're being aggressive somewhere.

    This is what I'd verify first:

    * Proforma rent growth

    * Natural annual rent growth

    * Expense ratio

    * Absorption rates

    Something is likely off.


     And one more big one:  Exit cap rate. 

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    3y
    Quote from @Brian Burke:
    Quote from @J Scott:
     Exactly. If this is a multifamily value add, they're being aggressive somewhere.

    This is what I'd verify first:

    * Proforma rent growth

    * Natural annual rent growth

    * Expense ratio

    * Absorption rates

    Something is likely off.


     And one more big one:  Exit cap rate. 

    Wow.  Not sure how I missed that one -- probably the place where the most operators are "fudging" the numbers these days...

    Thanks Brian!

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  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y

    if IRR 16% is promised in 2016 I may believe in, but in 2023 I would run away esp if it's Class A/B, it's just almost impossible ; also you have to really check the regional comps for that specific markt.

    If you really want to have a "deal in CRE", invest between 2023-2024 in "investment funds" that's targetting MF that has balloon payment this year or next year and having to exit, there're new funds out there that's targetting to buy "foreclosure-CRE MF".

    1Reply
  • Jack S.
    OP
    Rental Property Investor · Bay Area, CA · Member since 2022 · 14 posts · 12 votes
    3y

    This is a class A property with 1 of the top 5 fortune 500 company in its backyard. The strategy in 24 months is to gradually increase rents between $200-250 on average; even after rent increase it will be below most comparable properties in the area. Modernize community with new pool furniture, gym equipment/decors, carports, storage/garages, electric car charging, add smartlocks, thermostats, improve curb appeal, business center upgrades, etc... 

    exit strategy price/unit $194k -> sale price/unit 302k ; exit cap rate 4.75%

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  • Jack S.
    OP
    Rental Property Investor · Bay Area, CA · Member since 2022 · 14 posts · 12 votes
    3y

    Currently there are units being rented out at a 4% vacancy rate. They will finish building the remainder units this year.

    0Reply
  • Brock Mogensen
    Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes
    3y

    Definitely a lot more fees than a typical syndication.  Unless they aren't taking a GP equity waterfall?

    The most common fees are 2% acquisition fee, 2% asset management fee, and a 30-40% GP waterfall. 

    The fees and structure can vary wildly depending on the deal.  The syndicator should be spelling out clearly how all the fees tie into your return as the LP and what you stand to make over the hold period.  If there isn't clear detailed underwriting in the OM, I would steer away..usually a red flag. 

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  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Jack S.:

    This is a class A property with 1 of the top 5 fortune 500 company in its backyard. The strategy in 24 months is to gradually increase rents between $200-250 on average; even after rent increase it will be below most comparable properties in the area. Modernize community with new pool furniture, gym equipment/decors, carports, storage/garages, electric car charging, add smartlocks, thermostats, improve curb appeal, business center upgrades, etc... 

    exit strategy price/unit $194k -> sale price/unit 302k ; exit cap rate 4.75%


     what zip code ?

    If it's me, I would run away from class A for now despite who's telling, I will wait til 2025.

    0Reply
  • Dan Kennerson
    Rental Property Investor · Sacramento, CA · Member since 2018 · 51 posts · 11 votes
    3y

     30-40% is really the norm? 

    Are the LPs investing a significant portion of the capital to earn this? 

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    3y
    Quote from @Dan Kennerson:

     30-40% is really the norm? 

    Are the LPs investing a significant portion of the capital to earn this? 

    Typical multifamily syndication deals these days have a split of between 60/40 and 90/10 in favor of the LP, with 70/30 and 80/20 being most common.

    Many syndications also have a waterfall these days, meaning that the split percentage changes as the deal earns more money. For example, it's not uncommon that you see something like a 70/30 split until the LPs receive a 15% IRR and then the split changes to the 50/50.

    I've even seen deals where above a certain return (for example, at 20% IRR to the LPs), the split changes to 100/0 in favor of the GP.  In this way, the GP can pay the LPs a strong return and then they retain control of the deal and can keep the deal in perpetuity without an LP split.

    And typically, the LPs are providing all the equity for the deal -- in general between 25 and 35% of the total capital stack.

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  • Lucia Rushton
    Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes
    3y
    @Brian Burke:

    Hi Brian, I am curious to hear why you think that disposition fees are falling out of favor. thanks,

     

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  • Dan Kennerson
    Rental Property Investor · Sacramento, CA · Member since 2018 · 51 posts · 11 votes
    3y
    Interesting, thank you for the information. 
    Does BP (or BP Pro) have a boiler plate LP agreement? Or do I need to talk to an attorney for that one too? lol. 
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  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    3y
    Quote from @Lucia Rushton:
    @Brian Burke:

    Hi Brian, I am curious to hear why you think that disposition fees are falling out of favor. thanks,

     

    Many investors never liked them (not that investors like any fees).  They were a tough sell anyway because selling has historically been a lot easier and a lot less costly for the sponsor. 

    Contrast that to buying, which involves underwriting hundreds of properties, traveling to perhaps dozens of properties, spending money on due diligence for deals that don’t close or legal fees that never make it to contract…just to buy one deal.  Buying is expensive and acquisition fees are common (and fair) for that reason, among others. 

    But selling costs the sponsor little to nothing.  Plus, at the time of sale, if the sponsor did a great job they will be earning a lot of money via the promote.  Some investors see taking a disposition fee at the same time as double-dipping.  And if the sponsor did a bad job (or suffered a bad market), getting paid a disposition fee while investors lose money is a really bad look.

    And here are a couple more reasons:  If the deal has a waterfall where the sponsor is in a 50/50 split tier, the sponsor is effectively paying half of its own fee anyway.  Why suffer the optics for so little?  And, fees are ordinary income, while promotes are (generally) capital gain.  Why convert your sponsor distribution to a higher tax treatment?

    Disposition fees are still out there, and sometimes they make sense to have them, but for a typical multifamily value-add or core/core+ investment I’m seeing them less these days.  Perhaps other investors are seeing a different trend.


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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    3y
    Quote from @Dan Kennerson:
    Interesting, thank you for the information. 
    Does BP (or BP Pro) have a boiler plate LP agreement? Or do I need to talk to an attorney for that one too? lol. 

    Syndications pool money from investors who have little to no control over the investment -- by definition, shares in these types of investments are considered securities.  So, starting a syndication or fund is going to be regulated by the SEC, and potentially state agencies as well.

    As such, if you're considering starting a syndication/fund (or even just pooling money from investors for deals that you control), you're going to want to talk to a securities attorney.  They can create the documentation you will need to solicit LP investors, including the proper disclosures, business plan, verification of accreditation status (if you elect to only have accredited investors), contract, operating agreements, business/entity structure, etc.  They will likely also manage the compliance piece -- registering an exemption with the SEC, state registrations, etc.

    The entire process will take a week or two (from the time you have all the information about the deal), and likely cost in $10-20K range.  But, a good securities attorney can make the whole process relatively turnkey so that you can focus on finding the investors and raising the money.

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  • Lucia Rushton
    Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes
    3y
    Quote from @Brian Burke:
    Quote from @Lucia Rushton:
    @Brian Burke:
    It will be interesting when the syndications deals of the last 3-4 years come to market and they had a dispo fee disclosed in the original deal (if they don't forego them)
    0Reply
  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    3y
    Quote from @Lucia Rushton:
    Quote from @Brian Burke:
    Quote from @Lucia Rushton:
    @Brian Burke:
    It will be interesting when the syndications deals of the last 3-4 years come to market and they had a dispo fee disclosed in the original deal (if they don't forego them)
    If they were part of the original deal, and investors signed on to those terms, it’s highly unlikely that the sponsor will waive them.  But if the investors are losing money on the deal, the sponsor really should waive them even though legally they aren’t required to.  Loser deals require a big deposit to the karma bank, and nothing drains the investor/sponsor karma bank faster than taking more fees while investors lose.
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  • Solomon Rosenberg
    Investor · Rockland County, NY · Member since 2018 · 46 posts · 55 votes
    3y

    Always check in the ppm the section of fees and splits, I've seen decks that forget to mention some of the fees. 

    0Reply
  • Jack S.
    OP
    Rental Property Investor · Bay Area, CA · Member since 2022 · 14 posts · 12 votes
    3y
    Quote from @Brock Mogensen:

    Definitely a lot more fees than a typical syndication.  Unless they aren't taking a GP equity waterfall?

    The most common fees are 2% acquisition fee, 2% asset management fee, and a 30-40% GP waterfall. 

    The fees and structure can vary wildly depending on the deal.  The syndicator should be spelling out clearly how all the fees tie into your return as the LP and what you stand to make over the hold period.  If there isn't clear detailed underwriting in the OM, I would steer away..usually a red flag. 

    6% preferred return, waterfall 70/30 equity split until 18% IRR, then 50/50
    0Reply
  • Jack S.
    OP
    Rental Property Investor · Bay Area, CA · Member since 2022 · 14 posts · 12 votes
    3y
    Quote from @Carlos Ptriawan:
    Quote from @Jack S.:

    This is a class A property with 1 of the top 5 fortune 500 company in its backyard. The strategy in 24 months is to gradually increase rents between $200-250 on average; even after rent increase it will be below most comparable properties in the area. Modernize community with new pool furniture, gym equipment/decors, carports, storage/garages, electric car charging, add smartlocks, thermostats, improve curb appeal, business center upgrades, etc... 

    exit strategy price/unit $194k -> sale price/unit 302k ; exit cap rate 4.75%


     what zip code ?

    If it's me, I would run away from class A for now despite who's telling, I will wait til 2025.


     72712

    0Reply
  • Brock Mogensen
    Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes
    3y
    Quote from @Dan Kennerson:

     30-40% is really the norm? 

    Are the LPs investing a significant portion of the capital to earn this? 


     I would say a pretty common structure is a 7% preferred return to LP's, once that is achieved it splits to 70/30 (LP/GP).  On capital events, once all LP capital is returned, 70/30 split.

    Again, there is many many ways these deals can be structured; this is just a "middle of the fairway" structure example. 

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