Syndications Explained. Fees
Hey guys, I’m Dan with the high yield real estate investing podcast
This is part two of a multipart series designed to educate you on what to expect as a passive investor in a real estate syndication. In our last episode, we talked about the qualifications for investing in a syndication as well as some the return metrics presented to you. If you haven’t listened to that one yet we encourage you to do so. For this episode lets talk about fees. We all hate paying fees especially if we don’t understand the reasoning behind them. Here are some of the most common fees to expect in a multifamily syndication.
The first one is the acquisition fee. This averages between 1 and 3 percent of the purchase price and is paid once the property is closed. The purpose of this fee is to compensate the syndicator for all the work finding the property, competing with other investors to win the contract, and putting all the pieces to get the deal closed. And let me tell you, it’s no small feat to get deals done. There are SO many moving parts of an investment property acquisition to get moving in the right direction and getting it done on time. There are always multiple crises that threaten to kill your deal if they don’t get solved. You also have to raise money from a lot of people to make you deal happen. What I’ve just stated is pretty obvious to anyone who’s bought their own piece of real estate before. However, what’s not obvious is all the time spent chasing down deals that never come to fruition. Real estate investors say the general equation is- you evaluate 100 properties, make offers on 10 and end up actually buying 1 or 2. Finding and evaluating 100 properties takes a TON of time that is never compensated. You’re essentially working for free for as long as it takes to finally find that needle in the haystack.
The next most common one is the asset management fee. These are usually assessed yearly and probably average around 1 percent of either the purchase price, total net income, or equity under management. Syndicators have ongoing fees involved in running their businesses too. The software to run your investor portal, generate marketing materials, ongoing legal and accounting costs, and overall management of the asset can be accounted for with this fee. Now you may say to yourself, the managers also get a cut of the yearly cashflow! Why would they need to charge a fee on top of what they already get? Well, some deals give almost all the free cash flow in the first few years to the investor. In higher class properties and properties with a significant value-add component, the syndicator may not realize any profit for a number of years or even until the property is sold. Imagine doing all the work managing and turning around a property and not even realizing a return for a few years. This yearly asset management fee helps compensate the syndicator for just that. Personally, I have a day job that pays my bills and my partners do as well. I don’t feel the need to charge this fee if I have an asset that cashflows nicely within a year of acquiring it.
The last is a capital transaction fee. This can be paid out upon sale of the property from closing proceeds, or when a property is refinanced and certain percentage of investor capital is returned as a result. Expect a fee of 1-3 percent for this. Each syndicator will have their own parameters for this fee. This fee is largely performance based and is motivation for the syndicator to get as much of the investors’ money back or as high of a sale price as possible. If this fee is in conjunction with a refinance, then the fee is probably based off refinanced value of the loan. If it’s in conjunction with a sale, then it’s based off the closing price of the sale. The funds for this fee will come from the funds received from the capital event.
Every syndicator calculates their fees slightly differently or may have their own unique system to compensate themselves. If you, the investor, can’t understand their system then ask questions. Any reputable syndicator will take the time to explain them to you. Also, a reputable syndicator should present the financial returns on your investment after all the fees and profit splits have been taken out. So that 15% IRR that the syndicator was predicting includes the effect of their fees and profit split.
We should also tell you that there are many ways for investments to be structured. There are probably as many ways are there are syndicators. If you invest in a large plot of land that’s going to be used to build a subdivision, then expect there to be a completely different fee structure and profit split. But what I’ve just presented to you is rather common among the other multifamily syndicators I know of.
But where can you find the fees that a syndicator will charge? If it’s not in their presentation on the asset being acquired, look for them in a long document called the Private Placement Memorandum, or PPM. We’ll talk more about this document in a later episode. But if you’re familiar with mutual fund prospectuses, think of this as the rough equivalent for a syndicated real estate deal.
Thanks for listening. If you want to learn more, go to our website highyieldre.com . There, you’ll find a complete list of previous episodes and transcripts. Don’t forget to subscribe to get updates on our latest episodes. You can also find us through your favorite podcast service or Youtube. You can contact us through our website or by emailing info at highyieldre.com