Quote from @Zachary Ware:
I am interested in what you all think are the biggest ways that a capital stack/ fees can align with investors and GPs. For investors, what do you like to see as and as GPs, what do your fees look like to make sure that all parties' interests are aligned? I have read that some like to go light on the acquisition fees and heavier on the refinance/disposition fee.
I'd say acquisition fee typically goes with experience of sponsor. It's justifiable if you've gone full cycle multiple times and executed or exceeded proforma projections. If you're working with newer investors and don't have as much of a track record I'd shave that off to either give LP returns a little boost, or allocate more into operational reserves.
Unfortunately preferred returns have gotten kind of mainstream, but I don't think they align the interests of investors and GPs. Many deals, especially throughout stabilization year(s), can take a lot of adjusting, sometimes not hitting y1/2 proforma numbers in order to hit long term returns projections. This can cause heavy cash flow deficits in the early years, putting pressure on GP team to catch up while essentially working for free until they reach hurdle. The pressure and cash flow deficits can put GPs in a position where they might prefer to sell and cash out early instead of putting all the focus on maximizing performance and long-term profitability. Whereas if everyone is on board to collect returns based on the actual building performance it aligns everyone a lot more harmoniously.
Fees are also very situational. A heavy project can justify a higher asset management fee, but I still wouldn't go over 2.5%. It just has to make sense for everyone involved. You have to know the needs of your investors and your own personal needs and make sure the deal is structured so it's a win for everyone involved. Another factor to take into consideration is having in-house property management. If GP team is handling this, you could rationalize getting rid of the asset management fee, or rolling it into PM expenses.
When it comes to the refi/disposition fee, once again, everyone's best interests should be taken into account and it's very situational. There's a lot that goes into transactions, from acquisition to refinancing to disposition...Being ethical with fee structures and having everyone's returns minimums met I'd say is the first priority, then everything after that comes down do the amount of work that needs to be done to execute.
Every project is different and I think the main thing here is giving investors the highest return possible, while being ethical with fee allocation, and having full transparency with all partners involved.
