018: Top 5 Syndication Fees to Understand
Is there anything more annoying than 🍕🍟🍣 food delivery service fees? We mean, have you taken the time to look as to why your regular $10 Pad Thai ended up being $30 + tip by the time it gets to your front door?
Hidden fees, baby. 😩😩
It’s how the delivery companies stay in business. Because they know, some people, after a long day at work, just want to chill at home with a glass of wine and zone out, and they’re going to pay those seemingly innocent 3-10 extra dollars to keep their butt in that couch.
Hi, we’re some people.
And let’s face it, no one likes the idea of paying fees. If we had it our way, every deal or transaction would be cost-free‼️
If it’s for free, it’s for me.
However, this is America and that’s just unrealistic. After all, Uber Eats and DoorDash have to keep their doors open and operating, be sustainable, and honestly, make a profit. As a matter of fact, we’re happily paying those fees so they can work harder for us! 🤟
If you’ve ever bought a home, you’ll probably have a little PTSD of all the fees outlined on the settlement statement. Talk about a gut-punch, it never feels good. A part of the reason we feel this way is that we’re focusing on the loss instead of the gain.
No one likes to think of losing anything, especially money. But what if you knew that for every dollar we paid, we get 2X back in value? 😉😉 Then we would be patting ourselves on the back, telling all of our friends what a great deal we got.
Does the term “cashback” that credit card companies use as a classic marketing ploy ring a bell to anyone here?
So, in dealing with fees it’s crucial to understand why they are there and what the true value of the fees are. Is there a clear return on investment, or is this a waste of money?
While we can’t necessarily vouch for the $30 Pad Thai, when it comes to apartment syndication, fees are a part of the deal.
It’s important to understand what’s being charged, for what purpose, and what’s reasonable according to industry standards or the value received. Let’s be clear 〰️ this is the bulk of the work when it comes to making deals in apartment syndication. We have to weigh the cost, the value we receive back, the risk involved, and most importantly– ask if it aligns with our goals and objectives.
And of course, every deal is different and can carry different types of fees. Here are the five most common fees in apartment syndication that you need to know.
No. 1: Acquisition Fee
Remember group projects? Everyone played a role. Well, at least most people did. Every once in a while maybe you had to do all the work and then everyone else got to reap the benefits of your late nights learning and writing about a major world event. General Partners (GP’s) or, as they’re also known “deal sponsors,” are similar in nature.
They’re the ones out there ➡️ making broker connections, following up on leads, doing the proper due diligence on the investment, coming up with a business plan, winning the deal, working with lawyers to set up legal documents, paying for investor portals, and ultimately, acquiring the property.
Whew. We’re worn out just thinking about all that extra work. All of this happens before the deal is even presented to passive investors like you. Likely, the deal sponsors did this process for multiple properties before even securing a deal.
So yeah, back to the group project– if you’re the one out there hustling and making everything happen on the back end, you can see why it would have been nice to be compensated for all that extra work. The same goes for deal sponsors, this fee– the acquisition fee– is for them because they’re the ones who made the deal into a reality.
While it’s not considered a huge profit center for them, their work is essential to keep the business running. This fee is typically 👉 1%-2.5% of the purchase price of the property.
No. 2: Asset Manager Fee
In continuing with the work of the deal sponsor, there’s a lot they do to make sure the property is operating according to the business plan and making adjustments as necessary.
For some of you, this fee is a no-brainer to pay because it involves all the not-so-glamorous parts of apartment syndication. Work such as bookkeeping, analysis of data, market analysis, business plan implementation, setting up distributions, and communication to passive investors.
On your DoorDash fees, you might have seen a little charge for “convenience” and now you have a whole new appreciation for it.
All of this is compensated by the asset management fee. They are managing the asset on behalf of the investors (hey, that’s you!) in order to create a profit for all involved. 😵😵
Dare we say, they’re making it convenient.
The typical asset management fee is 1%-2% of all the capital invested or gross income of the asset. Make sure you note what it is!
No. 3: Property Management Fee
Ah yes, the management. Fear not, this isn’t your first boss in retail calling you to come in on your day off, but rather the guys looking to collect the rent. You know, operating the property you invested in and all that. Somebody has to do it!
This fee is to manage the day-to-day responsibilities of operating the apartment complex. This includes marketing and finding tenants to occupy the property, collecting rent, dealing with repairs, paying utilities, and whatever else is necessary to make sure the tenants have the very best experience as renters.
The cut to pay for the property management is 👉 somewhere between 3%-5% depending on how many units there are. Usually in the hundreds. The sponsors may have the resources to manage the property on their own, or they might outsource to another property management.
No. 4: Recapitalization Management Fee
We’re all familiar with the concept of refinancing. Recapitalization fees typically occur during the refinancing portion of apartment syndication. This is where we are able to capture some of the appreciation for our limited partners without diluting their equity share percentage.
The advantage of using this refinancing method is investors don’t pay taxes on refinancing proceeds, it’s one of the strategies we use. ⚡ But know that the fee is somewhere between 1-2%. Also, in the event that refinancing has the ability to return 100% of capital invested, from that point on, it becomes an infinity return since investors would already get a 100% . 😍😍
No. 5: Disposition Management Fee
As for the final fee, that would be the disposition fee. This fee can also be called the “catch-all” fee and it’s not necessarily seen on every deal.
Is this the king of all hidden fees?!
Not necessarily, if it is there, it is important to note that the General Partner will disclose. It is charged at the time of the apartment being sold and is 👉 usually 1%-2% of the sales price of the property. This catch-all fee covers the work and cost of preparing a property for sale including marketing, working with brokers, lawyers and other costs incurred while holding the asset.
Carried Interest, AKA The Club Promoter Fee
So, if you’ve ever been to 🎲🎰 Vegas, Atlantic City, or any other seemingly “nightlife party town” scene, you might have come across a club promoter.
You know, the guys that usually come to you dressed in a suit and tie and have a limo loffering a free ride to you and your girls (and maybe guys!) to a new club they’re trying to promote and get people to? For some of you, none of this sounds appealing because you wouldn’t be caught dead anywhere after 10pm. For others of you, this might be triggering some serious deep seated memories of bachelorette parties past.
Regardless, that same idea of a promoter shows up in apartment syndication. While this isn’t technically a fee (or a free limo ride to a cool club, we wish!), we felt like it was still important to disclose what’s often called the “carried interest”. It is the profit split and the main compensation for sponsors (aka promoters) to run and operate the deal.
While no deal is exactly the same, you might see something like 👉 a 70/30 or 80/20 split between Limited Partners and General Partners mentioned in the offering.
This means that after fees, the remaining cash flow is split according to this predetermined percentage.
Let’s zone in on that with a practical example. Say, after all, fees and the returns are paid out, and there is $1,000,000 in cash leftover. That money is already determined in a split between the Limited Partner and the General Partner.
They’ve talked amongst themselves and agreed on a 70/30 split. That means the Limited Partner would receive $700,000 and the General Partner would receive $300,000. That $300k is not a bad chunk of change in exchange for the “promotion” that the General Partners receive.
Of course, each deal is different and no two carried interest structures are necessarily the same, so it’s important to look carefully to understand what it is and for each deal. If it’s not outlined in the offering memorandum, make sure to ask the sponsor to clarify what it is or find it in the PPM (Private Placement Memorandum).
How to Put the “Me” in “Fees”
Your role in all of this is doing your proper due diligence with every deal you make.
We say this all.the.time.
Why? Because we know what it looks like when numbers are overlooked, deals don’t seem to add up, and then bad blood, resentment, and frustration occur. You have to identify and understand all major fees involved in every deal to avoid any confusion down the line.
So, to help check with that, here are the questions we often ask ourselves ⏬
- What are the fees and are they within normal ranges?
- Collectively are they on the higher or lower side?
- What’s the split? Between GPs and LPs?
- What are the projected returns and what’s the level of risk to achieve those returns (low, medium, high)?
- How confident are we that this sponsor can achieve these returns?
- What is the sponsor’s track record?
- Considering fees and the carried interest, do we feel that the interests of the sponsor are aligned with ours?
Answering these questions honestly with yourself is important when you’re weighing the risk level and benefit involved on any apartment syndication deal.
Here’s also a clear way to start thinking about these fees and the people procuring them: Are your interests aligned? AKA– do you trust the deal sponsor?
Like, “trust-fall” level of trust. Or “pay-you-back-for-lunch-without-a-venmo-request” trust.
When you and your deal sponsor are aligned on interest through the trust you have established with one another, you don’t have to worry about these fees being a loss. Without fees, the deals wouldn’t exist, that’s why you want your sponsor to be compensated well for what they are doing.
Which is to create generational wealth through passive income.
You’ll get the hang of it, and more importantly, find the balance. It starts with understanding how everything comes together to help you reach your financial goals.
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