Let’s face it: we syndicate not just because it’s fun, but because we want to make money… and not just money for our investors, but money for ourselves. The work that you put in as a syndicator should be paid. But any complexity that comes in on fees or promote will start to scare away investors.
We’re going to go through the different ways that you get paid, whether that’s through fees, or broker fees, or the promote. Setting this up, right and understanding this when you start putting a deal together helps you have those conversations with investors, and know that you’re not wasting anyone’s time in putting this deal together. When it comes to fees and promote, there are some pretty complicated setups out there. We want to keep things straightforward.
There are three different categories here: fees, broker fees, and the promote.
Fees, Broker Fees, and the Promote
Let’s dive right in and start talking about fees first. Fees are what you earn on a recurring basis for the work that you put in. As the deal is going on, you know all that money that you’ll be making after it’s closed. There’s also money that takes place at the very beginning, but this is for your direct labor. You can think of it as your income and wages. You were basically hiring yourself in order to do these things at whatever that rate is.
The broker fees are like a bonus. They’re a crossover between what you do as a syndicator and what you may be doing as a real estate agent. So this can add a significant pop to what you get in terms of income. But it is also still considered your income and wages.
And then the third category is the promote, which is the money that you’re making on the equity of the deal. It’s the participation that you’re getting as part of doing that deal. Each of these are radically different from deal to deal, so we’ll speak generally here.
Common fees that people get include property management fees, or the day-to-day operations of the property, collecting rents, making sure that work is being done, making sure any tenant concerns or repairs are getting done – all those things that a property manager does. Typically, this is between 3% and 5% of gross income, but it depends on the property type.
Often very closely related to property management are your construction fees. Many times an existing building is managing your capital improvements. Most of the time, these are between 5% and 10% of your construction budget, usually in hard costs.
Then you have your asset management fees. This is for the work that you do as a syndicator – making sure that the accounting gets done, the communications with investors happen on time, everything you do to run the asset or the portfolio of assets. Typically, this is between 1% to 2% of NOI, or even 0.5% to 1.5% of the equity. Sometimes this will be much higher, but it really boils down to your deal and what you think makes the most sense.
A lot of times there is an acquisition fee for all that work that takes place as the buyer of the property – like coordinating all of your inspections and making sure all the things get set up that need to get set up. A lot of times this is 1% to 2% of the purchase price. A lot of times the acquisition fee is charged, and then sunk back into the investment to buy the syndicator equity in that deal – in order to buy you your own membership units. So it’s money that’s paid, but it’s not paid as cash that you’d necessarily put in your pocket.
Then you have a disposition fee. And this is also 1% to 2% of the sales price. And this is for tasks like putting together all the due diligence materials, helping to select who’s going to be the buyer. Lastly is your finance theme. This is a little bit less common, but it is certainly not uncommon. And this is oftentimes 1% of the loan amount. This fee could also be looked at as a kicker, in order to say, in exchange for me signing on the loan, I get this additional money as well.
So those are the typical fees that we see. Then there’s the separate broker fees. You make fees as a syndicator and fees as a real estate agent. So you can be wearing two different hats at the same time. As a broker or real estate agent, you’ve got an acquisition fee, a disposition fee, and a leasing.
A lot of people ask whether it’s a conflict of interest to be taking a real estate commission at the same time that they take money as a syndicator. It absolutely is a conflict of interest. However, that doesn’t mean you can’t do it; you just have to disclose it and make sure it’s really clear about what you’re going to be getting as a syndicator. That way, the investor can make an informed decision for themselves whether or not to make that deal. They know where it is. Even still, you should act as a fiduciary first to your investors. And then at the end of the day, you can think about those fees for yourself.
In terms of acquisition fee, this tends to be 1% to 3%. The same goes for the disposition fee. Take a look at your local rules and be sure to be transparent about everything so you’re not being unethical by “double ending” the deal. Then there’s your leasing commission, which runs hugely depending on what kind of property it is. Usually you’re looking at 2% to 3% of the total lease value for your site.
Next, what are the typical fees that we see in a syndication now when it comes to promote? Well, promotes can get extremely complicated with waterfalls – with 13 different levels and 42 different share types and classes and subclasses… and the more overly complicated you make it, the more it’s going to scare off investors. But there are three ways that the promote most often happens.
The first is the sponsors equity. This is basically you getting a share of the deal right from the get-go. So let’s say there is a building that you’re buying and you’ve got three investors. Rather than splitting this out into thirds, sponsors equity basically says it’s going to give the sponsor 10% equity in the deal from the very beginning. That way, the investors are all getting 30% rather than the 33%. This frontloads all of the money to you, so there is no downside risk to you, because you’ve gotten 10% of the value of that property from the very first day. Just know that going in, because your investors will probably ask you about it. You can do this when you’ve got a really good property that’s worth significantly more than the very day that we’re buying, and by putting in all the work to get this deal together, you’re entitled to get that property. You’ll also be incented to make sure the property is run as efficiently as possible in order to maximize the investment for everyone.
The second way to do promote is what we call the harvest promote, which is very similar. Let’s say at the time of disposition, we return back to the investors the amount of capital that they paid in, and then we pay 10% of the rest of the money of the total profit to you, the syndicator. Then, we split the remainder between your investors. This is a good deal because it gets you paid right away, no matter what the appreciation of the property.
Can you do both a harvest promo and a sponsors equity at the same time? Absolutely. It would look like getting 10% of the shares in exchange for and also getting 10% of the income after the contributed capital gets paid back. Most of the time, by combining, it will give a different buy in amount. So say I will buy in for 5% but I’m actually getting 10%; thus I’m getting a discount on that amount – a sponsors equity of 5% and then still getting that 10% kickback that I bought for 5% that took place as part of that capital return. You also get 10% of the net as the harvest promote.
The third promote is your preferred return, and/or waterfall. These are way more prevalent than the other two mechanisms, and there are a lot of different ways to do it. Let’s say you have an 8% pref. So you make sure that your clients get 8% off the top of their contributed capital right away, and on an annual basis. So 8% and then anything that’s left (let’s say there’s an additional 2%) gets split 50/50.
This is where things get really, really complicated. It really doesn’t do anybody much good, and when investors see too many numbers, they just don’t get it – and often that scares them away. Unless you have a CPA or a finance major or an engineer as your investor, they probably won’t like it getting this complicated. Think about what makes the most sense for you and for your investors.
Are you ready to get started with your own syndication and need a private placement memorandum? Moschetti Law Group is a real estate syndication law firm and we’d be happy to meet with you to put together your Reg D PPM from a syndication attorney and guide you through the process of launching your own offering.
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Tilden Moschetti, Esq., is a highly sought-after syndication attorney with nearly two decades of experience. His clientele ranges from real estate developers and startups to established businesses and private equity funds. Tilden’s expertise in syndication law comes not only from his knowledge of syndication and securities law but from real, hands-on experience as an active syndicator himself in every real estate product type and nearly all markets in the US. His knowledge and experience set him apart and established him as the Reg D legal services leader.