Real estate investing is always a viable option for your capital. However, commercial syndication expenses can prove almost as complicated and confusing as some of its technical jargon. Understanding the process and foreseeing a reliable estimate of how much it takes to partake in a real estate sponsoring or syndication investment is vital.
In this piece, you’ll learn about the structure and main types of fees: asset management, acquisition, and equity participation. Other expenses that lie hidden will also be discussed in detail in order to enable you to make the right call regarding investing in the property market.
But first, what is real estate syndication?
The Best of Both Worlds
When a real estate syndicator/sponsor (person, firm, group of people, etc.) brings together an investor pool with several individual investors and aggregates their capital into a deal, you have a commercial real estate syndication.
This group of investors, a structure consisting of a syndicator/sponsor known as a general investor, passive/limited investors, and other parties, such as contractors, appraisers, litigators, etc. (vary depending on the project), all together take on a deal. It is spearheaded by the sponsor and is often a substantial commercial investment opportunity. The profits are distributed per their agreed-upon shares through what is known as waterfall distribution.
You could say this method of investment is crowdfunding, but it’s a little more complicated than that. Let’s look a little deeper.
Real Estate Development Syndication: Building Together
Real estate development syndication is accountable for numerous changes in any city and its properties. Investors literally shape and form living dynamics and alter the status of neighborhoods, urban communities, and businesses/business owners for better or for worse by the decisions they make on property type, function, audience, facilities, how inclusive/exclusive buildings are, etc.
This type of syndication is usually demand-driven. The conception of any deal that lies under the category of real estate development syndication is rooted in studying the needs and potentials of different locations/properties. When syndications are formed to pursue investment opportunities, in addition to the rate of return, daily costs of operation, etc., they also look into reliable data sources and various properties in order to make the right real estate investment.
Self-Storage Investment Syndication: The Way of the Future
In this strikingly fast-paced business environment, niche markets are rarities in all sectors and domains. They’re even rarer in the real estate market, with its centuries-long history and industry size. Self-storage investing is one of the latest additions, previously overlooked as a great business opportunity.
With relatively low maintenance costs, manageable development expenditure, and lower risk when it comes to market down periods, self-storage investing syndication is the right call to maintain a steady cash flow, and there are few ways it can go wrong. Besides, when you can attain profitability so soon, who wants the headache of lengthy apartment/office building construction? Instead, you can rake in income faster by making your syndication investment in self-storage!
The Real Estate Syndicator/Sponsor
In the syndication structure, the syndicator/sponsor is the person/party in the picture from day one. As the general partner, they envision the deal, attract investors, and oversee the process. In any project they are sponsoring, they own the property and make all the big decisions, and they are therefore held accountable for any/all outcomes.
Also, legally speaking, they are the ones that are taking responsibility for delivering the final syndicated deal (in line with their arrangements with other partners).
What Do Commercial Real Estate Syndicators Do?
Before any investor is invited to take part in a deal, the sponsor takes on tasks that consist mostly of getting more real estate investors interested in the possible benefits of a deal. That is, aside from negotiations that lead to the property’s acquisition, they must provide the limited investor with information that convinces him/her to take the plunge (investing in the deal).
These marketing materials include detailed estimates of the required project capital and third-party reports that confirm their envisioned profits, as well as several other financial reviews and documentations.
Why You Should Get Your Syndicator Before Making a Deal
Because of the vital and delicate role they play in the fruition of a syndication deal, one must always be confident of the sponsor you have chosen. After all, you are trusting your hard-earned capital with them. They represent not only their own interests but also yours, as well as those of all other limited investors.
Although what they have at stake is almost always more than any individual limited partner, the fact that as a limited partner, you are a passive/silent partner. Therefore, you must be cautious and quite careful when selecting the eligibility and reliability of your sponsor. After all, you are divulging your leverage (hard-earned money) to them.
Syndication Investment: Wanting In
There are several different scenarios in which a sponsor gets investors involved in syndication. Limited investors can be brought in before, during, or after property acquisition. And the objectives for every real estate syndication may differ from project to project.
In all cases, the limited investor is looking to take part in a more extensive operation. The investors expect this operation to help secure benefits/profits for them. They usually lack the experience and know-how that would allow them to undertake such an endeavor independently.
Wait, Why Am I Paying All This Again?
What eventually makes up an investor’s expenses is what they pay to the sponsor/general partner to manage, oversee, and deliver the agreed-upon final product.
The sponsor finds an opportunity in a property or a potential real estate development project, evaluates the requirements toward reaching fruition, estimates the possible revenues, prepares the acquisition contract, completes other legal and financial documentation, etc., with the ultimate objective of getting enough investors interested in getting the project off the ground.
Subsequently, the sponsor shall manage the property toward the projected outcome, fulfilling commitments made to investors in the agreement, etc.
How Can You Be Charged as an Investor?
For their services, the syndicator will charge each investor to cover for the work that goes into all the stages before the project commencement (estimation, cost assessment, bringing investors together, etc.) and during real estate development (operating costs, contractors, maintenance, legal, etc.). Here is a more detailed look at the main ones:
Asset Management Fee: How Much Does it Cost?
Simply put, an asset management fee is imposed for having capital managed by a professional asset manager. The fee is calculated based on a percentage of Asset Under Management (AUM), ranging from as low as 0.10% of the gross monthly revenue on a property (or share of the property) to 2%. This fee covers the management of the capital itself and the time, expertise, and administrative work that goes into managing the asset.
It is notable the asset management fee does not include managing the property. The syndicator’s role that allows him/her to charge for asset management is to supervise property management and how the partnership agreement’s totality works with the investors.
Among other details of services that must be included after charging the asset management fee is sending out financial and legal notices to the investor and helping with managing tax filings. Ultimately, what asset management will work towards is maximizing property’s profit and value, managing risks, minimizing costs whenever possible, etc.
More Action to Take on Assets Means More Work and Higher Fees
When discussing the concept of asset management, one must recognize that these management services are provided to a wide variety of assets/capitals. The rate range is partly due to the investment type. It goes without saying that the asset management fees rise in line with the amount of action required. Therefore, the investor will be charged based on how active the management of his/her asset needs to be.
Acquisition Fee: How Much Does it Cost to Own?
As a silent limited partner, one is almost always among the last people to get on board the project. The real estate syndicator/sponsor does the research and identifies the opportunity of possible syndication with other investors.
At this stage, acquisition becomes the next order of business. It takes place in various manners, depending on the real estate syndicator’s policies, the state of the property as well as many other factors.
The syndicator might move to purchase the property to secure their interest in a deal that might slip away. They might also plan and prepare for an attractive presentation of a syndication opportunity to more limited investors. In either of these cases, they get to charge limited investors with what is called acquisition fees.
Real estate sponsors go through several options to find the right deal to finalize. They also pay all the expenses for the estimate, the acquisition process, etc.
What Does an Acquisition Fee Cover?
Acquisition fees cover whatever action the syndicator undertakes before finalizing a deal from due diligence to finalizing the purchase. They can range from 1 to 2% of the project value (contingent on negotiation, project size, etc.).
Don’t Be Fooled by Numbers!
As a limited investor, one must keep in mind that what the syndicator charges is a percentage based on the total project value rather than on the value of an individual investment. Therefore, a 1.5% acquisition fee might add up to 4-5% of your investment in the project (calculated based on the entire project’s scale).
Equity Participation: This Is OURS Now
Another way to compensate for the time/expense of a real estate syndicator/sponsor is equity participation. This is basically giving away a percentage of the property’s ownership interest over to the syndicator/sponsor in exchange for the indispensable expertise/experience they input into a project. The range of the equity split percentage varies from case to case (since syndication terms differ from one project to another).
Some syndicators prefer to bring in more investor capital to the table to maximize their return/percentage. In contrast, others decide to stick with their experience as their sole breadwinner and don’t risk any of their capital during the project.
Things to be Cautious About with Equity Participation
Equity participation can be tricky since it can end up in many ways, and there are many factors at play. This is mostly because each project brings in its own set of unique pros and cons and eventual outcomes. There is also the preferred returns factor (not necessarily fixed; may not live up to expectations). Hence, the equity stake is negotiable as deemed appropriate by the parties.
Overlooked Real Estate Syndication Fees: Look Out!
Knowing the main fees involved in anything is a good thing. It will keep you out of trouble and make an investor a wiser decision-maker regarding inevitable expenses and make those expenses more manageable. However, there are more to the fees that are waiting for you in dodgy back alleys, hiding there and waiting for your smallest mistake to pop out and make your life more difficult.
Profit Splits: Real Estate Sponsors’ Share of the Pie
Profit splits need to be paid close attention to. This includes the return on each investor’s share, from project conception to investment fruition.
For example, if syndication is being conducted on a property (say, an apartment building) with shares that amount to the property’s total equity, the syndicators will make sure of the market value of your share in the property and its purchase price. When the project is completed, they will be able to deduct their percentage (from the return of the assets generated).
Fees for Work Needed to Afford the Property
Debt placement fees can arguably be covered by acquisition fees; however, some sponsors might challenge this belief. A debt placement fee is charged when the syndicator has put time and effort into obtaining financial aid in the form of a loan to secure an acquisition deal. Debt placement fees are calculated as 1% of the financed amount.
On the other hand, a loan guarantee fee is charged when that same loan could only be granted by a third-party guarantee, or the sponsor, who in turn would want their share of the loan they have fought to secure. This fee could amount to 1-3% of the loan value.
More Real Estate Broker Rights to be Aware of
If the real estate syndicator/sponsor is a licensed real estate broker, a real estate commission may be charged for the selling/acquiring the property. The investor must be cognizant that this fee falls outside the terms/structure of the syndication at hand, and it is the right of the licensed broker to charge for their services within the real estate market.
However, the rates for a real estate commission must follow local commission regulations (should be mentioned in the syndication agreement so investors are informed beforehand).
There are also more fees as deals/projects become more complicated/bigger. Expenses like refinance fees, disposition fees, expense reimbursements to the sponsor and return on deferred fees, and many more can also be listed on the investor’s syndication bill with the syndicator. Hence, one must always be privy to the contents of the agreement and make the right call.
Things to Look Out for Before Making a Deal
Aside from all the expenses that go into having a successful project, the limited investor needs to also show good judgment for a successful outcome. Just as the people you meet are not all the same, syndicators, too, vary from one to the other in so many different ways.
Financial matters, plans, and strategies must be taken into account and considered in length and depth. There are also decisions that the investor should probably seek professional consultation on. However, there are some things that can be noticed even by an inexperienced investor.
Grab Your James Bond Gear and Go to Work
The credibility of the syndicator, for instance, is a factor that can be thoroughly checked through a more in-depth assessment of their resume, previous projects, etc. Remember that the investor has all the rights to ask for a clear and reliable demonstration of any syndicator’s capabilities as an investor, silent or not.
The investor can also dig deep into the marketing material they present and verify their veracity. For larger projects, syndicators take their time with the estimation/calculation process and even bring in third-party experts to come up with the most reliable picture of the project’s potential financial viability.
Recap of Real Estate Syndication Fees: A’s to Z’s
We touched on some basic and principal fees included in any commercial real estate syndication practice. Here below is a final look as well as a summation of the ways an investor can be charged for real estate syndication fees:
All the A’s
Asset management fees are charged for managing assets proposed to a general investor in a real estate syndication. The asset management fees can range from 0.10% to more than 2% of the asset (based primarily on how active the management is with the asset).
Acquisition fees are paid to the real estate syndicator for work done to secure the acquisition deal, including research, evaluation, due diligence, and administrative work. These fees can range from 1-2%. However, keep in mind that the percentage is based on the entire commercial real estate syndication process’s market value, adding up to more than 1-2% of the investor’s share.
Equity participation is how the syndicator, via the agreement, can require ownership interest of the property they are syndicating. Their ownership interest in this regard is subject to several factors, ranging from what they decide to bring into the project and how much a limited investor is willing to venture into their commercial real estate syndication project.
Other charges to look out for include profit splits, debt replacement, loan guarantees, and commissions, as well as additional fees a commercial real estate syndicator will ask for as compensation when they secure the preferred return for your investment.
Phew! Now we have finally covered almost everything that can be said about the fees that apply to these investments. We navigate through the main highways as well as the intricate and somewhat scary alleys of syndication in the real estate market. We now know what it takes.
Within the world of real estate investment, syndication fees come in so many shapes, forms, and sizes that it is almost impossible to be aware of them all. But it is always good to know that you’ve done your homework before you make any decision. If you’re ready to take the next step but still need that final push or reassuring insight, please contact us for additional information and/or clarification.