Clients often ask about the different fees that syndicators typically charge. At one point, a couple years ago, I wrote two whitepapers about the various different fees. In truth, there are an infinite variation of fee. I’ve seen more rare fees like construction management fees (for vertically integrated companies) or licensing fees (for projects in which the sponsor has an expertise in licensing). In most cases where the fee is more rare, the sponsor provides a service that they would ordinarily contract out to a third party (i.e. construction management, licensing).
Rare fees aside, there are some fees that are more commonly charged. Those include:
• Organization and due diligence fee: Some people call this the Acquisition Fee. It’s typically a one-time fee on the purchase of a property or of each property, usually one to three percent of the purchase price of the property. The sponsor usually earns this fee at the close of escrow on the acquisition or the close of escrow of the property and this fee basically is to compensate the sponsor for their efforts in conducting due diligence on the property and for making the investment opportunity available for investors.
• Asset management fee: Also very popular and very widely used. It compensates the sponsor for their efforts in oversight and management of the company and property during the course of the investment. Typically, sponsors charged a 1 to 2% asset management fee based on the gross revenue collected from the property and its usually earned monthly.
• Property management fee: Oftentimes, this fee is not charged by the Sponsor themselves if they are not geographically close to the property. The Sponsor will go and hire a third party property management company.
• Debt placement fee: this fee compensates the sponsor for helping to obtain acquisition or purchase financing on the property because getting a loan is a lot of work. Usually sponsors who charge this fee charge 1% of the original purchase price of the property
• Loan guarantee fee: for loans that require some sort of personal guarantee, this fee compensates the guarantor of the loan (whether or not the sponsor) between one to three percent of the loan.
• Refinance fee: this fee is charged towards the end of a deal. The sponsor may earn a refinance fee as compensation for their efforts in obtaining refinancing on the property. It’s usually half a percent to one percent of the new loan amount and is earned on the origination date of the new loan.
• Disposition fee: a one-time fee that compensates the sponsor for their efforts in marketing the property or properties.
• Real Estate commission: If you are a licensed real estate broker or salesperson and you want to take a commission off the acquisition or the sale of the properties that you also want to syndicate, that’s perfectly fine. You just have to disclose this to investors, and the commission should be commensurate with local real estate commission rates. If you are not a licensed real estate broker salesperson in your state, unfortunately, this is a fee that you cannot take unless you plan to get licensed in the jurisdiction where the property is located.
• Expense reimbursements: There are many expenses associated with doing a real estate syndication deal, including traveling to the property, performing due diligence things, forming entities, etc. Out-of-pocket expenses are reimbursable on startup of the company and thereafter.
• interest on deferred fees and manager advances: Sometimes syndicators they don’t realize that they can charge interest whenever they defer their fees or reimbursements for expenses that are owed to them. That rate is usually at ten percent, but sometimes sponsors like to set it lower. Sometimes beginner syndicators will not charge an interest rate because they are afraid of scaring away investors. Any deferred fees or manager advances should be paid off as quickly as possible so that investors are not paying the sponsor the interest.
Note that you should not charge all of these, lest you want to scare your investors away. However, charging some of these fees is not only fine–its normal.