When the sponsorship team of a real estate syndication puts together a new investment opportunity, many moving parts must be dealt with until closing. Due diligence, investor relations and financing all need to be handled and secured. In exchange, the syndicator (AKA GP) will likely want to be paid for their time, like anybody working a job would be.
Below, I have outlined the few ways a real estate syndicator will earn money throughout the life of the deal.
- Acquisition Fee
When the general partnership identifies and gets an asset under contract, the work needed to get to the finish line will be quite extensive. In exchange for the time and efforts, the general partners will generally earn a 1%-5% fee, paid by their investors at closing.
For example, if the asset is being purchased for $10,000,000 and the Syndication team is charging a 3% fee (you should be able to find this in the offering summary), the fee will be $300,000.
2. Asset Management Fee
Once the deal is closed, the work doesn’t end for the operator and their team. Just the opposite; the work is just beginning. Running a large real estate asset is a full time job. As a result, the operating team will choose a payment structure in one of two ways:
A. Take a flat fee of X amount of dollars per unit per year.
For example, on a 300-unit apartment community, a sponsorship team may take $300 per year per unit as an asset management fee. This would equate to $90,000 yearly, regardless of how much income the property collected.
B. Take a percentage of all income generated from the property per month:
If the asset produced $50,000 in one month and the fee was 1%, then the asset management fee would be $5,000.
It is important to figure out how much a management team would be collected on the first approach as it can likely result in more fees being paid than the second approach. All the more so, this is a fee they earn whether the property performs well or not. Do your homework.
3. Equity Ownership
Aside from the built in fees, the general partnership will participate in the equity upside of the deal. This percentage ranges deal by deal and generally, the GP’s will not see as much cash flow during the life of the deal, and that’s fine. As a trusted syndicator, you have a responsibility to protect and grow your investors capital, so giving them the majority of the cash flow is essential. Usually the sponsor will see the fruits of their labor at the sale or refinance of the asset, when majority or all of the equity is returned.