Syndication Fees and How the GP Makes Money
When looking at investing in a syndication, it’s important to understand how the General Partnership is going to get paid and knowing what the different fees they charge are. We’ll go through the standard range of fees you’ll see, what the GP does to earn the fee, and most importantly make sure each fee is aligned with your best interest. There can be numerous fees a syndicator might charge and various ways they make money, but we’ll discuss the 6 most common below.
Acquisition Fee - typically 1-3% of the purchase price of the asset and is paid to GP at closing. Think of this as a consulting fee that the GP earns by putting together the entire project. The GP does a lot of work just to get a deal to the closing table. This includes building a team, market research, finding the deal, analyzing and underwriting the deal, securing financing, performing due diligence, and ultimately closing on the asset. If the team is very experienced with a proven track record, you should expect this fee to be at least 2%.
Asset Management Fee – this is an annual fee that GP team charges to manage the asset and execute on the business plan. Even though there is professional property management in place, the GP team will oversee them and have weekly calls (at a minimum) to make sure the business plan is being executed.
This fee can be % based on collected annual income, or $ per unit based. 2-3% is typical for an asset management fee. I prefer seeing operators with a % based fee as it shows alignment of interest. The more revenue they collect, the more $ both investors and GP make. To take it a step further, you want to know if this fee is before or after the preferred return to investors. I like to see it after, meaning if the investors don’t get at least their preferred return, then this fee isn’t paid to GP.
Splits – also known as profit splits. We typically see a 70/30 split. 70% goes to the limited partners and 30% to the GP. The profit splits come after the preferred return. If we have an 8% preferred return, that gets paid out first and then any cash flow above that amount would be split 70/30.
This should create another alignment of interests, as the GP is incentivized to generate a return higher than the preferred return. If all they do is hit an 8% return, then they lose out on the ability to make money.
Loan Guarantee Fee – typically around 1% of the loan amount and paid at closing. This can be the sponsor, or a high net worth individual the GP brings in to sign on the loan. Even though these loans are typically non-recourse, the bank requires someone on the GP to sign on the loan who has the net worth and liquidity requirements of a loan this size. This fee is warranted given the additional risk the loan guarantor is taking on.
Disposition Fee – typically around 1% and due at closing. Often times this is only paid out if a deal exceeds a certain IRR threshold. This is a fee that rewards the GP for taking the asset full cycle, executing on the business plan, and arranging the ultimate sale of the asset.
Construction Management Fee – this is an ongoing annual fee paid to the GP for overseeing the capital improvements happening at the property and can be anywhere from 5-10% of the renovation budget. Especially with value-add apartments, there is often some sort of renovation/remodel happening at the property and the GP is responsible for making sure the renovation process stays on schedule and on budget. For the extra efforts of managing this process, they want to be paid.
So there you have it, 6 common fees you might see in a Real Estate Syndication. These might not all be on every deal you come across, but at a minimum you should expect an acquisition fee, asset management fee, and some sort of profit split.
When reviewing different opportunities to invest in, make sure the projected returns the syndicator is showing you are after GP fees have been paid. If not, your returns will be less than what they are projecting.