Syndication associated fees

[Jack S.]

I am interested in investing for the first time with a syndication deal that is offering equity multiple of 2-2.3x, CoC 5-6%, IRR 16%, 5 year term, but I'm a little hung up on all the fees associated with it: an acquisition fee of Two Percent (2.0%) of the purchase price upon closing of the Property, (ii) an ongoing asset management fee of Two Percent (2.0%) of estimated gross income to be paid monthly during Company ownership of the Property, (iii) a construction fee equal to Five Percent (5.0%) of the rehabilitation budget of the Property, (iv) a disposition fee of One Percent (1.0%) of the sales price upon sale of the Property, (v) a guarantor fee of One Percent (1.0%) of the purchase price upon closing of the property, and (vi) a $20,000 marketing fee to be paid at closing.

I was wondering if I were to put 100k into this deal how much actual ROI I would see after all the fees are accounted for? Also are there any reliable syndication calculators or spreadsheets that I can use in the future?

[Brian Burke]

@Jack S., I wrote a whole chapter on fees in  The Hands-Off Investor, but the quicker answer is that some of these fees are a bit on the high side.  The asset management fee is usually the most opaque fee because there are so many different ways to calculate it.  2% of gross income is double what I most often see, and it’s usually of actual gross income not estimated gross income.  Guarantor fees are most often a percentage of the loan amount, not purchase price, so this one is above market.  Disposition fees are still pretty common but are falling out of favor.  The rest of these fees seem fairly typical.

The fees are also related to the promote (profit splits).  Some sponsors charge higher fees and a lower promote, others may opt for lower fees and a higher promote.  For example, one common trick is for the sponsor to offer an 8% pref followed by an 80/20 split in an effort to attract investors who avoid 70/30 or 60/40 splits, but then charge an asset management fee of 1% of the asset value. Depending on how the investment performs, that structure could be way worse for the investor than the higher sponsor split with a 1% asset management fee based on gross income.

If you want to know how your $100K investment will perform, look at the package that the sponsor gave you. If it isn’t abundantly clear, you are investing with the wrong sponsor.  They should be showing you performance projections with the fees baked in.  If they show you projections without reflecting the fees, that’s a problem. 

Now whether those projections are believable or achievable is a whole other discussion.