Understanding Multifamily Syndication Fees

Real estate syndication fees can impact investor returns, yet I’ve come to realize that  many passive investors don't fully understand the various fees associated with multifamily deals. In this newsletter, we break down the typical fee structures you'll encounter in multifamily syndications.

Acquisition Fees

The acquisition fee, typically ranging from 1-3% of the purchase price, compensates the sponsor team for their work in finding, analyzing, and closing the deal. For a $10 million property, this could mean $100,000-$300,000 in acquisition fees. While this may seem substantial, consider that the sponsor team often spends 6-12 months and large risk deposits evaluating dozens of deals before finding the right opportunity.

Asset Management Fees

Asset management fees cover the ongoing oversight of the investment and typically range from 1-2% of gross collected revenue annually. These fees compensate the sponsor for managing property operations, overseeing the property manager, and making strategic decisions to optimize performance. For a property generating $1 million in annual revenue, expect $10,000-$20,000 in yearly asset management fees.

Refinance and Disposition Fees

Some  syndications charge a refinance fee (1-2% of the loan amount) when the property is refinanced and a disposition fee (1-2% of the sale price) when the property is sold. These fees compensate the sponsor for managing these complex transactions and aligning their interests with a successful exit.

Profit Splits and Promote Structures

While not technically fees, the sponsor's share of profits should be noted when evaluating a potential investment opportunity. Common structures include:

• 70/30 split (70% to investors, 30% to sponsors) - This can be literally any percentage split but some portion of profits are awarded to the sponsorship team for the work of finding, managing and exiting the deal.
• Preferred returns - This is the minimum return an investor will receive before any profit sharing begins. It is important to understand these are not guaranteed but a way to put investors first in the deal.
• Some deals include multiple tiers with increasing sponsor shares at higher return thresholds

Due Diligence Questions

Before investing, ask these key questions:

1. What are all fees charged in the deal?
2. How do fees compare to market standards?
3. Are there caps on any fees?
4. What services justify each fee?
5. How do fees align sponsor and investor interests?

Remember, lower fees don't always mean better returns. Focus on sponsor track record, business plan execution, and overall alignment of interests. The best sponsors earn their fees by delivering superior returns through operational expertise and strategic management.

Disclaimer: The information provided is for educational purposes only and should not be considered as advice. Always consult with a qualified professional before making any financial decisions.