The most important part of the deal for many reasons is the sponsorship team. These are the people that are putting the deal together and making the investment possible. The sponsors earn fees at closing and often throughout the life of the property. These fees are often misconstrued or misunderstood. Let's talk about what exactly the normal fees are and why they are given.
There are a few different fees that can be charged in an investment, and each of them carries a different weight. The most common fees are an acquisition fee and an asset management fee, however, some teams also include a refinance or disposition fee.
An acquisition fee can be anywhere from 2-5% of the purchase price. This fee is paid at closing and is paid to the sponsor (GP) team. The Asset management fee is 2-3% of the net revenue collected, going to the asset manager who is a part of the sponsorship team.
Often when fees come up in conversation, investors become skeptical, and rightly so. There are a few too many scammers, fraudsters, and greedy teams out there that are including hidden fees and overcharging. However, the bad eggs aside, there is a very important and necessary role that fees play in a deal. The sponsors are not charging fees to make a quick buck or because they're greedy, they charge fees because it keeps food on the table for their family, and they've earned it. Let's dive in deeper...
Reason 1 - Its a lot of work putting a deal together
From the investor's perspective, the process is simple. An investor finds the team running the deal, reviews the team and the deal projections, and invests in it.
On the sponsor's side, there is a lot more going on behind the scenes. Before a deal can be presented to investors, there first needs to be a person, team, and or company that is experienced and focused on doing this. This alone takes years of experience, connections, and education.
Once the team is up and running, they need to find a deal, vet the deal, negotiate the deal, submit the deposit (their money), perform due diligence (physical and financial), coordinate with title, attorneys, brokers, sellers, contractors, property managers, and investors to close the deal. This process can take anywhere from a few months to years. All the while, they're not getting paid.
The point is, putting a deal together takes a lot of time, knowledge, and effort and is valuable. Without this happening, there would not be an investment. The acquisition fee is paying the sponsor for all of their work upfront to present this deal and make it happen.
Reason 2 - This is their livelihood
In order to be a successful syndicator, it needs to be a full-time job. The difficulty is, these people can't wait several years to be paid or else they wouldn't last very long. Even if they could, it's a tough gig to work on a project for several years without receiving any payment. They need some sort of income to sustain them while a deal is ongoing. This is the purpose of the asset management fee as well as another reason for the acquisition fee.
The asset management fee is for managing the managers. The property management company is excellent at what they do; contracting, leasing, maintenance, etc. However, it doesn't necessarily mean they are watching the budget, paying full attention to rent projections, rent raises, occupancy, and the overall investment picture. This is the job of the asset manager, to continuously meet with the property management company to ensure everything is going according to plan. The asset manager fee ensures the team is paid for their continuous work and allows them to do their job in its entirety.
Reason 3 - It's their expertise, team, and experience
Last but not least, fees are charged for the expertise the sponsorship team brings to the table. This expertise consists of their experience, knowledge, education, and connections. This is the same idea as if someone is hiring a realtor to buy or sell their house. Someone is paying the realtor for their expertise in real estate transactions and their commitment to getting someone through the process correctly. A realtor knows how to price a property, is trained to find/fix issues that are costly, and understands the legal paperwork and process for the transaction. A person asking for this magnitude of help would not expect it to be free, the same applies to an investment.
Overall, fees are a critical part of the syndication process. These basic fees are in place because the sponsorship team put the deal together, manages it constantly, and has built a career around making the process a fantastic journey.