While real estate syndication offers lucrative opportunities for those investing, it should also benefit the organizers arranging these deals — the syndicators. They deserve fair compensation for all the effort and work they put into making deals possible.

If you belong to this group, you must be familiar with the challenging scenarios of explaining the complex fees and promote structures to your investors. This article aims to help you clarify these concepts for them.

We will focus on three main areas: Common fees, broker fees, and the promote. The various charges and incentives outlined within each category represent the methods through which you can earn your dues.

Categories of Fees and Promote

Syndicators in real estate typically receive fees from investors, similar to a salary, to support their continuous efforts. These are intended to fund the oversight of the property, reward the syndicator’s team for their ongoing involvement, and ensure all parties have aligned interests. Overall, the fees are structured to facilitate the effective management, enhancement, and eventual sale of the property.

Broker fees act as supplementary income for your crossover role as syndicator and real estate agent. While substantially boosting your earnings, these are still considered part of your wages.

The promote is an incentive structure designed to motivate the syndicator to achieve strong financial outcomes. This mechanism works by rewarding you with a slice of the profits when certain financial milestones are reached. 

Altogether, these fees and incentives help create a balanced and efficient investment environment. They ensure that properties are well-managed, transactions are expertly handled, and everyone involved is motivated to work towards the shared goal of maximizing the property’s potential and profits.

Common Fees

Overseeing a real estate syndication involves a wide range of tasks for which the syndicator can receive various types of compensation.

Property Management Fees

These cover the ongoing costs of the upkeep and smooth operation of the property for continued tenant satisfaction and consistent cash flow from the investment. Depending on the property type, they typically range between 3% and 5% of gross income.

Construction Fees

When a project includes renovations or new developments, the syndicate compensates the syndicator’s project team for overseeing the construction from start to finish. Such fees usually fall between 5% and 10% of the construction budget.

Asset Management Fees

Real estate syndicators can charge extra for the comprehensive management and strategic direction of the investment. This task focuses on preserving and enhancing the property’s value over time for long-term profitability. Asset management fees typically range from 1% to 2% of NOI (Net Operating Income) or 0.5% to 1.5% of the equity. Sometimes, they can be higher, depending on the specifics of the deal.

Acquisition Fees

This one-time expense is tied to the identification, evaluation, and purchase of a property. It’s a reward to the syndicator for their upfront efforts, due diligence, and expertise in securing a high-potential investment and getting the project off the ground.

Ranging from 1% to 2% of the purchase price, the syndicator’s acquisition fee is sometimes reinvested into the deal as their own equity (membership units).

Disposition Fees

Usually 1% to 2% of the sales price, disposition fees are incurred when the property is ready for selling. They cover the costs associated with the sale, including marketing and negotiating terms with potential buyers.

Finance Fee

Less common but not unheard of, this payment is often set at 1% of the loan amount, which you could consider as an extra incentive for signing the loan.

Broker Fees

Syndicators who also hold a real estate agent license can significantly increase their revenue by earning broker fees. This dual role allows them to tap into additional income streams and gain an extra layer of financial benefit.

Acquisition Fees

When a syndicator helps a syndication firm purchase properties that align with its investment criteria, they can be compensated for their broker expertise. Thorough market analysis, identifying assets, negotiations, and closing deals are crucial for securing a profitable investment. The broker’s 1% to 3% acquisition fee acknowledges this professional input.

Disposition Fees

As brokers, syndicators earn 1% to 3% for effectively marketing the property and negotiating the best possible sale price.

Leasing Fees

Another revenue stream for syndicator-brokers is the commissions earned when you successfully lease space within the syndication’s property. The amount can vary widely based on the property type but falls between 2% and 3% of the total lease value.

A syndicator’s ability to earn broker fees provides a financial advantage and aligns their interests with those of the syndication’s investors. However, it can sometimes be considered a conflict of interest, so you need to disclose it clearly and prioritize your fiduciary duty over your personal earnings.

Promote Structures

In real estate syndication, these are essential mechanisms that determine how profits are allocated between investors and syndicators. Below are the three most common promote structures.

Sponsor’s Equity

The syndicator in a real estate syndication is also referred to as sponsor, and their equity represents the share of the investment they hold for overseeing the project. This stake ensures their vested interest in the venture’s success.

You get your share of the deal, say 10%, from the outset. For example, when purchasing a building with three investors, the sponsor’s equity entitles you to the agreed percentage from the beginning instead of dividing the equity equally. The investors then receive the remaining equity.

Harvest Promote

This incentive occurs at the time of sale and ensures you get paid regardless of the property appreciation amount. After returning the initial capital to the investors, you receive a percentage of the total profit. The remaining profit is then split among the investors.

Preferred Return (Waterfall Structures)

Under this arrangement, investors are prioritized to receive a predetermined minimum return on their investment before any additional profits are shared with the sponsor. With a systematic profit distribution, investor interests are safeguarded, and a transparent framework is established for profits flowing through the investment.

The flexible tiered nature of the waterfall model also incentivizes the sponsor to maximize returns. By tying a portion of their compensation to the investment’s performance, they are motivated to achieve the best possible outcomes.

While the preferred return structure is widely used in real estate syndication scenarios, it can get very complex. Too many numbers could overwhelm investors and potentially drive them away, so reserve it for the financially savvy ones.

Final Thoughts

As a real estate syndicator, understanding and effectively managing the various fee structures and promote arrangements is crucial for both maximizing returns and maintaining investor trust. It presents a significant opportunity for those who can master its complexities.

Simplicity also plays a key role. Keeping these concepts straightforward not only makes them easier to comprehend but also helps avoid potential misunderstandings or disputes down the line. A well-defined approach to these aspects will help you build a solid reputation, attract more investors, and streamline your operations.

But most importantly, acting in the best interest of your investors should always be at the forefront of your strategy. This means not only being transparent and fair in your dealings but also continuously seeking ways to improve the investment’s performance.

Whether through diligent property management, strategic renovations, or effective market analysis, your efforts to enhance the value of the syndication’s assets will ultimately benefit everyone involved. Need legal counsel for your real estate syndication? Shams Merchant is the leading real estate private equity and syndication lawyer in the country, representing clients in award-winning real estate projects. Specializing in real estate syndications, fund formations, securities law, and private placements for commercial property investments and development, Shams has been featured in publications like Law360, the Austin Business Journal, BisNow, and The Real Deal.

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