Rental Property Investor · KY · Member since 2013 · 1k+ posts · 539 votes
Currently evaluating a multi-family syndication deal. From a quick review so far (assume that the numbers check out, the operator has been vetted, etc.), here is the deal structure / fee structure:
85% / 15% cash flow split (investors/syndicator) - no preferred return 3% PM fee (100+ units) - seems low 4.9% acquisition fee 1.9% capital raise fee - never heard of this one before 0.35% asset management fee - ongoing fee each year 85% / 15% profit split on back end (investors/syndicator) I did not see anything regarding a disposition fee, but wouldn't be surprised if there was one.
This just seems like a lot of layers of fees (acquisition + capital raise + asset management). Am I wrong? What am I missing?
Acquisition Fee: Too high. I charge two fees. Acquisition fee and Finance fee. Both combined are under 5%.
Capital Fee: Never heard anyone using this.
.35% Management Fee: Too low. Typically, depending on the size of the asset, this is 1% - 2%.
Split: 15% is not enough to incentivize the sponsor. Especially on an 100-unit deals. This really should be 70/30. The important perspective is that in this case, the sponsor is charging too much in fees up-front, too little to oversee the project and much too little on the back. This can mean that either the deal is not good enough to get the sponsor 30% on the back and still pencil for the investors, or the sponsor simply wants all of the money upfront, which is not cool. What's going to keep his head in the game if he can't make any money on the back...
Every syndication/deal and sponsor is different. But having said that, the terms you outlined seems abit off. Generally speaking, deals need to be able to support a 70/30 split and a 8% pref to be a good deal. If it start deviating from that towards investors (ie. 85/15 split) means that the deal may be too "thin" to attract investors, hence the heavier split to investors.
Acquisition fees are usually around 1-3%
Haven't heard of capital raise fee...maybe loan fee? around 1-2%
Asset management fee: around 1-3%
Disposition fee or capital event fee (refi, sale): 1-3%
Fees for syndication are fairly common. Always vet the sponsor first then the deal.
Acquisition Fee: Too high. I charge two fees. Acquisition fee and Finance fee. Both combined are under 5%.
Capital Fee: Never heard anyone using this.
.35% Management Fee: Too low. Typically, depending on the size of the asset, this is 1% - 2%.
Split: 15% is not enough to incentivize the sponsor. Especially on an 100-unit deals. This really should be 70/30. The important perspective is that in this case, the sponsor is charging too much in fees up-front, too little to oversee the project and much too little on the back. This can mean that either the deal is not good enough to get the sponsor 30% on the back and still pencil for the investors, or the sponsor simply wants all of the money upfront, which is not cool. What's going to keep his head in the game if he can't make any money on the back...
Sponsors should get paid for success and align their interest with investors. 1% asset management fee on equity, 8% 70/30 with no catch up and 1% acquisition fee is the most you should accept. Anything higher...walk away. Many will charge even less. Read the PPM. You will be surprised at what sponsors will try and get away with. In the old days, the unsophisticated investor had no idea what a fair split was. The jobs act and the transparency of the internet has changed that. Thank goodness.
Personally, I don't like deals without a preferred return because there is a reduction of alignment of interests. No matter how poor or well the deal performs, the GP gets paid. With a preferred return, the GP only gets paid (from the profit split) if they achieve the preferred return first.
I'm evaluating a deal now, but it is typical for the sponsor to have a "30% of all distributions catchup" fee at selling of the property, this is after investor capital is returned, and a 7% preferred return is given to investors.
The catchup fee is prior to the 70/30 split, and then after a 13% IRR is achieved, the split goes to 50/50