Syndication fees explained

[Bellman Tumasang]

Everyone please help me out I’m really confused. Let’s say a syndication deal or equity fund consists of an 80/20 split, 1% acquisition fee on purchase price, 1% disposition fee on sale price and 1% asset management fee of gross rents.

Does the 20% split get paid to the sponsor individually and then the management fees such as acquisition fee, disposition fee and asset management fee get paid to the management firm LLC?

I keep researching and it says sponsors get paid these fees to them I thought the firm gets the fees to hire people such as sponsors etc and sponsor only get an equity split and perhaps a salary as they work in the management firm? 

Someone please explain with an example structure as that’ll really help clear my confusion up.

[Roni E.]

@Bellman Tumasang

So let us go through an Example

$10 Million Acquisition Price (The cost to buy the apartment complex)

$3.5 Million Investor Capital (So investors put in $3.5M to own 80% of the project, 80% of the LLC in this security/investment)

Let's assume the Complex produces $2 Million in Gross Rent. So yearly the sponsor will earn 1% Asset Management of the $2M yearly which is $20k. This is for the sponsor asset managing the deal. There is still a third party management company handling all day to day items. 

Let's say Yearly after all expenses are paid plus the mortgage that is $500k left over. So the investor would get 80% of the $500k which is $400k and the Sponsor gets yearly $100k.

The Sponsor at closing will earn an Acquisition of 1%. So take $10M times .01 equals $100k. That amount is paid to the sponsor at closing.

Let's say in 5 years that complex is sold for $14M, so disposition fee of 1%. So take $14M times .01 equals $140k paid to the sponsor at closing. 

Let's say the profit is $3.5M at closing. So investors would get 80% of $3.5M which is $2.8M and the Sponsor would get 20% which is $700k. 

So the 20% split, the acquisition fee, disposition fee, and management fee is all going to the Sponsor. In the P&L there will be line items of what the third-party property management firm will be charging using 3% or less if 300 units or more. Then there will be a line item for salaries and so forth for the property manager at the site, maintenance folks and so forth.

I hope this helps.