If you are looking to invest in real estate and want to determine what property to invest in, but don’t have a bunch of time to manage the property yourself, then a syndication might be right for you. If you don’t know what a syndication is, have a read of this post first.
At its most basic, a syndication is a way to pool investor money and purchase a property, while one person, the sponsor, finds the deal, manages it, and dispositions (sell or refinance) it at the end.This sponsor takes on a lot of the risk, limiting investors to only the amount invested. For this, investors give up day-to-day control of the property. The sponsor generally asks for some money to recoup expenses (but sometimes to make a buck). These are syndication fees and they come out of the general fund of the property.
- Acquisition fee – this common fee is taken by the sponsor at closing. It is used to offset the time and cost that the sponsor spent in evaluating 100s of deals, negotiating, and fronting some of the acquisition expenses. Look for this fee to be about 1% of the purchase price. A higher amount sometimes is present, but the investor should ask the sponsor to explain why it is so high. This fee should be present in most deals.
- Loan guarantee fee – this fee might be taken by the sponsor, but might be some other person involved with the deal. A big benefit of investing in syndications is that most investors do not have to personally guarantee the loan. This means that if the place fails, they lose only the amount of their investment and don’t have to repay the bank the entire loan. The loan guarantor does, so this is a big risk for them, and they usually get reimbursed for it. Look for this to be around 1% of the total value of the loan (that’s what is financed, not the value of the property).
- Asset management fee – this is not the same as property management fee. Prop management is the operations for the property, the interface with tenants. Asset management is the back end interfaces with insurance and the tax man, for instance. This pays to keep the LLC in good standing and make high level decisions about construction and rehabs as well. The sponsor should take this fee, about 2% of the gross receipts annually.
- Construction or development fee – This is paid to the sponsor in deals that involve a lot of construction work. A big construction involves management of the contractors and likely daily visits to the construction site. It’s a big task, and this is reimbursed. This fee often comes as a percentage of the amount budgeted to do the construction and might be 3% typically.
- Refinance fee – This is paid to the sponsor when the property refinances. The argument is that it reimburses the sponsor for doing the work involved to refinance. This typically is not a huge amount of work, so it should be low, less than a percent, if it is charged.
- Disposition fee – this fee might have a refinance rolled up in it, or a sale. When the deal is completely done, a fee is charged by the sponsor to close the deal – which is a lot of work. I’ve never asked for one of these, but I don’t get upset if a sponsor does. It’ll be about 1% of the sale price and is thought to be an incentive for the sponsor to sell for a high price.
- Marketing fee – this fee is to pay back the sponsor from the time and money it took to market to investors and get them signed on to the deal. I don’t like this fee either. The sponsor makes plenty of money back in other fees and tacking this one on feels like a money grab to me. Sure, it’s expensive to find investors, but they are the ones bringing money to the deal. It seems counterintuitive to then charge them for the privilege of coming on, something which the sponsor needs to make the deal happen.
All of these fees come out of the bottom line of the property. They decrease the investors’ end profit, so they need to be justified. The more fees charged, the less I like it. I’m not talking about amounts – that can be pretty high and not be a problem. I’m talking about the number of fees. Many of these are a way to scrape money out of the deal and to be hidden. Next time you are evaluating a syndication, have a close look at the fees. Make sure that they cause your and the sponsor’s interests to align.