Cedar River Properties Newsletter (1/28/23)

This week’s newsletter explains the different fee structures included within an apartment syndication deal.

Some investment opportunities have hidden fees and are not transparent at all with what they are offering and where the money is going.

I believe in being truthful upfront when it comes to putting a deal together.

Below are the four different fees you can expect to see in a syndication deal.

Typical Fees in a Syndication Structure

1. Acquisition Fee

2. Asset Management Fee

3. Refinance Fee

4. Disposition Fee

1) Acquisition Fee

The first fee that takes place in a syndication deal is an acquisition fee. This is typically 1-5% of the purchase price depending on the size and scope of the project.

If there is a potential for higher profits in the deal, the percentage might be on the higher end.

This amount is usually paid to the general partner for the amount of work it took to find, analyze and put the deal together.

2) Asset Management Fee

The second fee typically charged is an asset management fee. An asset management fee is typically 2% of the collected income.

After the property is purchased, there will be active work involved with overseeing the property manager and regular KPIs (Key Performance Indicators).

Instead of the asset management fee being a flat rate based on the number of units, it is a percentage of the income collected, which shows an alignment of interest with the passive investors that is based off performance.

The more income that is collected, the more income the general partner makes on the deal giving them extra incentive to be efficient in this area.

3) Refinance Fee

The third fee typically involved in a deal is a refinance fee, which is a percentage of the new loan amount. Typically, the refinance comes after renovating apartments and executing the first portion of the business plan.

Once this is completed, the value of the property will have increased, and it is a great time to pull money out of the deal and pay back some of the capital to the investors.

Typically, there is a hurdle that has to be cleared in order for the fee to be collected.

For example, the passive investors must receive 50% of their capital paid back at refinance in order for the general partner to earn the fee.

4) Disposition Fee

Last but not lease is the disposition fee. This fee is paid when the property is sold and is usually a specific percentage of the sale amount.

After several years of executing the business plan and overseeing it, there is an incentive to bring the deal across the finish line and cash out.

Most of these fees are needed to compensate the general partner and its team members for the work put in to make the deal happen.

There can also be property management fees paid to the sponsor if the company is vertically integrated and has their own property management team in house.

Lastly, the loan guarantor or person who signs on the loan is also usually given a percentage of the loan amount as compensation for signing on the deal.

I hope this newsletter showed an insight into the fees involved in a typical apartment syndication deal.

Obviously, the majority of cash flow and profit splits are paid to the passive investors, but that will be a topic for another week.

Have a great weekend everybody!