asset mgmt fee and preferred returns

[Jeremy Porto]

Hello!

A few questions about how the returns get disbursed in a syndicated MF deal...

1.  I've seen that the asset management fee is typically 1-3%....of what?  The gross rents?  The rents that are collected?

2.  Is asset management fee taken out before or after the passive investors' preferred returns?

Thanks for the help!

[Brian Burke]

@Jeremy Porto the easy one to answer is #2. The asset management fee is paid before cash flows to the waterfall.

#1 is more difficult to answer because the dirty secret in the syndication business is that asset management fees are almost always described as “1%” but the similarities stop there. 

The method I use is 1% of gross collected income.  This is the same way property managers calculate their management fees. 

But I also see 1% of the capital raised, 1% of the total of debt plus equity, and 1% of the property value (typically determined by a cap rate specified in the calculation in the operating agreement).  

Using any of these methods would result in an asset management fee far higher than using 1% of gross collected income, yet the sponsor will still say “1% asset management fee”. An investor that isn’t paying attention and is comparing one offering to another might completely overlook the fact that the asset management fees are actually vastly different.