Real estate syndication fees are charges incurred during the process of pooling capital from multiple investors to invest in a real estate project. These fees compensate the syndicator (the party managing the investment i.e. the GP) for their work and can significantly impact the returns to investors. Here's a breakdown of common syndication fees and how they typically flow into a preferred return waterfall:
Many of the real estate models I've built have an integrated GP/LP waterfall and syndication fee inputs.
Common Real Estate Syndication Fees
Acquisition Fee:
- A one-time fee paid to the syndicator for finding, analyzing, and acquiring the property. It's usually a percentage of the purchase price (e.g., 1-3%).
Asset Management Fee:
- An ongoing fee paid to the syndicator for managing the property and overseeing the investment. This is typically a percentage of the effective gross income or a flat annual fee (e.g., 1-2%).
Disposition Fee:
- A fee paid to the syndicator upon the sale of the property, usually a percentage of the sale price (e.g., 1-3%).
Refinancing Fee:
- A fee charged if the property is refinanced, often a percentage of the new loan amount.
Construction Management Fee:
- Charged if there are significant renovations or construction, usually a percentage of the construction costs.
Financing Fee:
- Sometimes charged for arranging financing for the project, either as a flat fee or a percentage of the loan amount.
Preferred Return Waterfall
A preferred return waterfall outlines the order in which profits from the investment are distributed among investors and the syndicator. Here’s how syndication fees typically flow into this structure:
Operating Income:
- The property generates income through rents and other sources.
- From this income, operating expenses (property management, maintenance, etc.) are paid first.
Payment of Fees (income for GP):
- Acquisition Fee: Paid upfront at the time of purchase.
- Asset Management Fee: Paid regularly (monthly, quarterly, or annually) from the property’s income and usually based on gross rents or total capital raised.
- Other ongoing fees (construction management, financing fees, etc.) are also paid from operating income or capital events (like refinancing or sale).
- Investors receive a preferred return on their invested capital before any profits are shared with the syndicator. This is typically expressed as an annual percentage (e.g., 8% preferred return). This is different from an IRR hurdle but some call the first IRR hurdle a preferred return. This is not truly accurate. A preferred return has nothing to do with return of capital, it is just a claim on the return amount (x% of investment, but not the investment itself).
Return of Capital:
- After the preferred return is paid, any remaining cash flow goes toward returning the initial capital invested by the investors.
- This can be structured many ways. Usually cash is split at a defined rate between GP/LP until the capital is fully returned and this will often not happen until REFI events or exit.
Profit Sharing (Promote or Carried Interest):
- Once the preferred return and return of capital are satisfied, remaining profits are split between the investors and the syndicator according to a predefined structure. For example:
- Investors might receive 70% of the remaining profits.
- The syndicator (GP) might receive 30% as a promote or carried interest.
Disposition and Other Fees:
- Disposition Fee: Paid to the syndicator upon the sale of the property, usually from the sale proceeds.
- Refinancing Fee: Paid if applicable, often from refinancing proceeds.
Example Flow
Acquisition:
- Acquisition fee is paid to the syndicator.
Ongoing Operations:
- Property generates rental income.
- Operating expenses and asset management fees are deducted.
Cash Flow Distribution:
- Preferred return is paid to investors.
- Any remaining cash is used to return the initial capital.
Profit Distribution:
- After the preferred return and capital return, remaining profits are split according to the profit-sharing agreement (e.g., 70/30 split between investors and syndicator).
Capital Events (Sale or Refinance):
- Disposition fee or refinancing fee is paid.
- Proceeds are distributed according to the waterfall (preferred return, return of capital, profit sharing).
Understanding these fees and their impact on the preferred return waterfall is crucial for investors to evaluate the attractiveness and fairness of a real estate syndication deal.
If you need financial modeling customization works for your specific waterfall structure, you can hire me here.
Article found in Real Estate.
