Recall the last time you bought a home or a car, wading through fine print and fee disclosures. Investments entail fees too, compensating those who manage the investment. Understanding these fees is crucial for you and your investment partners. Let’s decode the fees in a commercial real estate syndication and understand their implications.
Deflating Investors’ Myths Around Real Estate Syndication Deals
As with any misunderstanding, therein lies some false beliefs and assumptions. So, let’s take it from the top in our comprehensive fee explanation journey, and debunk the top myths investors believe when it comes to real estate syndications.
Myth #1 – Investors Have No Control
You may believe that when you invest in a commercial real estate syndication, all control over your capital is relinquished. This is far from the truth because, while you may not be selecting paint colors or problem-solving for trash pick up, you have 100% say in what type of asset you invest, the asset class, the capital amount, which deal with which sponsor, whether you choose a value-add deal or not, and so much more.
When you invest in a syndication, your control is exerted up front, during the selection and research process so that once you’ve selected a deal and wired your funds, you can use the precious time you have to do what you want with those you love.
Myth #2 – Investors Earn Lower Returns
Maybe you’ve heard a rumor that syndications yield lower returns, but this is confusing because real estate historically outperforms the stock market. No matter what type of investment you’re exploring, make sure you’re comparing “apples to apples.”
Many investors (even experienced ones!) can make the mistake of comparing gross returns to net returns. Since gross returns are the profits or earnings before any fees are taken out while net returns are reflective of what you’ll actually take home, this could be quite misleading.
When exploring and comparing commercial real estate syndication deals, yes, there are always fees, but there are 3 things to consider as you sort through them:
- Are the fees creating alignment between the investment and asset goals of the general and limited partners and driving performance?
- Can you still make a reasonable (projected) return on your capital that propels you toward your goals?
- Are the sponsors being transparent about the fees being charged and what they’re for?
No one likes hidden or surprise fees, so when the general partnership is being transparent, the fees listed are reasonable, and you still make money, that’s a win!
If you’re like me, you don’t have the time or mental energy for fee gymnastics. Instead, ensure that your investment choice is based on the projected net returns across the board. That is, you want to be comparing investment opportunities’ returns after fees have already been removed so you have clarity on how that passive income might affect your budget and your goals.
The Most Common Fees In A Real Estate Syndication Investment
Understanding why fees exist and their purpose is crucial for evaluating a syndication deal. Let’s delve into each fee type:
- Acquisition Fee: Typically 1-3% of the asset’s purchase price, covering due diligence costs for acquiring the asset.
- Asset Management Fee: Around 1-2% of projected gross income or invested capital, covering ongoing management costs.
- Construction Management Fee: For value-add or development deals, 5-10% of the expected construction budget ensures proper project oversight.
- Equity Placement Fee: An upfront fee for obtaining investors, usually 1-2% of the capital invested.
- Loan Fee: Compensates for securing financing, typically 1% of the loan amount.
- Guarantor Fee: If a loan requires a key partner’s personal assets as collateral, this fee, about 1-2% of the loan amount, compensates them.
- Refinance Fee: About 1-2% of the refinanced loan amount, this fee compensates parties involved in refinancing efforts.
- Disposition Fee: Covering marketing and sale costs, typically 1-2% of the asset’s sales price.
How To Become A Fee-Savvy Passive Investor
Understanding possible fees and their purposes empowers you to evaluate syndication deals effectively. At EquityNest, transparency is paramount. Our proforma projections are typically net of fees, reflecting our commitment to clarity. With fewer fees, you can make informed investment decisions. Join EquityNest today to explore opportunities and become a savvy investor.
