Key Takeaways

• Sponsor fees are charges levied on investors in a syndication so that sponsors are fairly compensated for the work and risk they take on as a General Partner.
  
• There are several types of sponsor fees including acquisition, development, property management, asset management, construction management, and disposition fees.
  
• Sponsors can charge this fee through various distribution methods such as percentage-based fees, flat fees, and fees based on a particular timing during the syndication cycle.
  

Starting your real estate journey as a sponsor means understanding the hard work you are going to do and how well you will be compensated for it. The profit potential isn’t only in the success of the deal but also in the sponsor fees you will receive throughout the life of the syndication deal. 

The sponsor fees you collect will help you conduct your operations. This includes sourcing a lucrative deal, managing the property, and ensuring compliance for both you and the investors. Additionally, you ought to be compensated for steering your investors towards a successful outcome. 

So, in this blog, I have included all the important fees that sponsors charge in their real estate. By understanding these fees, you'll be well-equipped to evaluate your own profits.

Understanding the Types of Sponsor Fees

As a fellow sponsor, I was able to identify all the different types of fees involved during my syndication journeys. Here are all the fees you will be charging to ensure the syndication is conducted smoothly:

Acquisition Fee

This fee compensates you for finding and securing the investment property. It's typically a percentage (1-3%) of the purchase price. As a sponsor, you will conduct thorough due diligence on multiple properties before settling on one. The acquisition fee will essentially compensate you for your time, effort, and expertise invested in sourcing and underwriting the deal. 

Example:

Let's say you find a promising apartment building for your syndication with a purchase price of $5 million. A standard acquisition fee might be 2%.

Here’s how you can determine the acquisition fee:

Acquisition Fee = Purchase Price x Fee Percentage = $5,000,000 x 2% = $100,000

This fee compensates you for the time and effort spent identifying, analyzing, and negotiating the purchase of the property.

Development Fee

Development fee is a fee that you will charge during the development of the property and after acquisition. In the development phase, you will indulge in many development-related tasks, such as getting permits, securing zoning, getting approvals, etc. 

You can charge a certain percentage of the total development cost or a flat fee depending on the project’s complexity and size. 

Example:

Imagine you're leading a project to develop a new retail space. The total development cost is projected to be $20 million.

In this case, let’s assume you decided to charge a 4% development fee. So, the amount you will get us:

Development Fee = Total Development Cost x Fee Percentage = $20,000,000 x 4% = $800,000

This fee covers your oversight of the entire development process, ensuring it stays on track.

Property Management Fee

Some sponsors outsource the property management to a third-party and include that expense in their deal. However, many sponsors choose to manage the property by themselves, meaning that they conduct their in-house property management. 

In such cases, sponsors have more control over the costs associated with property management, and they can charge a fee accordingly. 

If you are conducting property management by yourself, then you will be taking care of the day-to-day operations and management of the building. This will include functions such as tenant relations, rent collection, and maintenance.

Asset Management Fee

An asset management fee is the fee that reflects whether you are being compensated for utilizing your expertise in financial management when managing the asset for the investors. This means ensuring that the following tasks are performed with optimum efficiency:

• Choosing a Property Manager
• Financial reporting
• Budgeting 
• Implementing optimized asset management strategies 
• Making strategic decisions to maximize returns
• Evaluating market conditions and deciding whether to hold or sell 

Typically, this fee is a percentage of the gross monthly revenues (1-4%) or equity deployed.

Example: 

Let’s assume you actively manage an asset. You make financial decisions, and ensure the property runs smoothly. You decide to charge an asset management fee of 1% of the Gross Monthly Revenue (GMR) and the GMR is $80,000.

So, here’s the amount you will get monthly:

Asset Management Fee = GMR x Fee Percentage = $80,000 x 1% = $800 per month. 

This fee compensates you for your ongoing strategic management of the asset.

Construction Management Fee

As a sponsor, you will also charge a construction management fee if the property in question is being constructed from scratch or major renovations are being done. 

This fee is meant to compensate you for overseeing and managing the construction and ensuring timely completion. 

Typically, the construction management fee is 5-6% of hard construction costs but you can reduce this percentage if the size of the property is small.

Example: 

Let’s say you are syndicating a multifamily property that needs to be constructed from the ground up. The hard construction cost of the property comes out to be $15 million. You have decided to charge 8% of the hard construction cost. 

Your construction management fee will be:

Construction Management Fee = Total Construction Cost x Fee Percentage = $15,000,000 x 8% = $1,200,000.

Disposition Fee

This fee is earned when you sell the property. It incentivizes you to achieve a successful exit strategy by taking a percentage (1-3%) of the sale price. 

Example: 

Assuming that you decide to sell the property after several years of successful operation for $6 million and charge a disposition fee of 2%, the amount will be:

Disposition Fee = Sale Price x Fee Percentage = $6,000,000 x 2% = $120,000. 

This fee incentivizes you to achieve a profitable exit for the investors.
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How Does Real Estate Sponsor Fees Work?

There are two primary sources of income you will receive as a sponsor. One is through the different types of fees that I have mentioned above. The second is through the return you will receive on your own equity investment. When this amount is higher than the returns your investors get, it is called “Promote”.

Let me put this into perspective. In a syndication, you will be the General Partner (GP) or the sponsor and your investors will be the Limited Partners (LPs). As you will be investing a minimum amount yourself and the majority amount will be invested by the investors, you will distribute the profits in a certain structure. 

Now, if the deal outperforms your expectations and you are able to give your investors the preferred return that they had asked for.  Chances are you will still have earned quite a lot of profit on your equity investment. This profit will be the ‘promote’ on the property. 

However, this ‘promote’ is not guaranteed. Also, ‘promote’ is not available to the sponsor until the property starts to perform as or beyond expectations, which means the sponsor will have to wait to earn his fair share. 

That’s exactly why sponsor fees are created. Sponsor fees ensure that the sponsor is being compensated for putting in their time, money, effort, and resources so that the investors don’t have to lift even one finger. 

How are Real Estate Sponsor Fees Charged?

You can charge sponsor fees based on your own research, the needs of the property, and your ability to foresee future real estate trends. What I mean by that is that you should not rely solely on what I have shared above. 

The above fees are calculated on a percentage basis, but there are other ways you can charge your fee. 

Here are the most common ways a sponsor charges their sponsor fees:

• Percentage-based Fees: Many sponsor fees are calculated as a percentage of certain financial metrics related to the investment property. I have shared the examples for this above. 

• Flat Fees: Some sponsor fees are charged as fixed amounts rather than percentages. These flat fees may be charged for specific services or transactions, such as:

➡ Development Fee: A predetermined flat fee for overseeing the development or significant renovation of a property.

➡ Construction Management Fee: A fixed fee for managing the construction process.

• Fee Based on Timing: Some sponsor fees may be charged at different stages of the investment lifecycle, for example: 

➡ Upfront Fees: Some fees, such as acquisition and development fees, are typically paid at the beginning of the investment, either as a lump sum or in installments.

➡ Ongoing Fees: Management fees, including property management and asset management fees, are usually charged periodically throughout the investment's holding period, such as monthly or quarterly.

➡ Performance Fees: Incentive-based fees, such as asset management fees tied to performance metrics, are typically assessed at regular intervals based on the investment's performance.

• Disbursement Mechanism: Sometimes, sponsor fees are disbursed from the investment's cash flow. For example:

➡ Property management fees may be deducted directly from the rental income generated by the property.

➡ Asset management fees may be calculated and paid based on the investment's financial performance.

A Must-remember Rule for Sponsor Fee

It's crucial for sponsors to provide clear and transparent disclosure of all fees charged to investors. This includes detailing the calculation method, timing, and frequency of fees in the syndication documents.

Conclusion

As a real estate sponsor, a well-defined fee structure is essential for your success. It is important to understand the types of sponsor fees and how you can charge them so you are fairly compensated for the work you are going to do. This compensation plan should reflect your expertise while aligning with your investors' goals.

And in this crucial step, transparent communication about these fees is key to building trust and attracting qualified investors. Remember, your interests are ultimately intertwined with those of your investors. So, by structuring fees that incentivize strong performance, you can create a win-win situation for everyone involved. 

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