How are Closing Costs / Attorney Fees covered?

Question

Hi,

When syndicating an apartment building, who typically covers the attorney fees and closing costs?  Does the syndicator or is that a fee paid out by the investors?

Thanks.

Eli

Andrew Freed · Answer

@Eli Shicker - Every syndication is different, but usually that is encompassed in the total capital needed to close and that is raised from the investors. If the GP fronts the funds, they are typically reimbursed. But like I said, syndications are handled in many different ways so it could differ depending on the structure.

Brock Mogensen · Answer

Those costs are built into the capital raise.  Generally, all closing costs are bucketed into one category on the OM.

Michael Le · Answer

They are reimbursed IF the deal closes. Deals do indeed fall through and in that case the GP eats those costs.

Evan Polaski · Answer

@Eli Shicker, yes, the costs do ultimately effect overall returns, but depending on the size, it can have a large or small effect.  A set of docs, as discussed one another forum, can run about $15k +/-.  Other DD costs due vary based on property size, but again, they don't grow in a linear manner, so ultimately have lower upfront costs per door on bigger deals and lower upfront costs as a proportion of equity on more expensive deals.  Both ultimately would have a lower effect on LP returns.

Per Michael's comment, while most syndicators will eat the cost if a deal falls through, that is not necessarily the case. Most LPAs are structured that partners are "accepted" upon execution by both parties.  So, while most syndicators realize the reputation damage will far outweigh the expense reimbursement, it is not guaranteed and theoretically, if the partnership fails to acquire the asset, you could be liable for out of pocket costs, sometimes with interest included.

Evan Polaski · Answer

@Eli Shicker most commonly these are costs fronted by the sponsor, but ultimately born by the LPs.  Same with earnest deposits, due diligence expenses, etc.  These would commonly be considered formation costs, which are a reimbursable cost of the partnership.

Eli Shicker · Answer

Got it thanks.  I assume I would be paying out a return on these costs that are reimbursed by the LP's, correct?

How are Closing Costs / Attorney Fees covered?

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