Due to the capital required to execute a commercial real estate deal, investors often pool their resources in a process known as real estate syndication. This model includes two parties; the syndicator (or sponsor) finds and executes the deal, and the investors contribute capital without day-to-day involvement. Syndicators charge fees to compensate for their deal-making services – frequently acquisition fees for finding and buying a property. As such, we’ll use this article to answer the question: what’s a typical acquisition fee in real estate syndication?
Specifically, we’ll cover the following topics:
- Real Estate Syndication Overview
- Acquisition Fees in Real Estate Syndication
- Final Thoughts
Real Estate Syndication Overview
Overview
Frequently in commercial real estate, an investor finds a great deal but lacks the capital to make it happen. On the other side of the coin, many passive investors want a return on their investment but lack the time or expertise to find and execute a real estate deal.
Real estate syndication solves both problems. In this system, a deal syndicator (also known as a sponsor), finds, underwrites, and vets a commercial real estate deal. As part of that underwriting process, the syndicator identifies the cash gap, that is, the difference between the cash required and the cash he plans on personally contributing.
With this cash gap and the deal’s projected returns identified, the sponsor pitches the deal to potential investors. In a commonly-used syndication model, the investors receive a minimum required return – paid out prior to the syndicator receiving a return on his equity investment. If the deal’s performance exceeds this minimum return, the syndicator receives a disproportionate amount of that upside through his catch-up return and promoted interest distributions. This set-up A) protects the investors, and B) incentives the syndicator.
Syndication Example
We’ll use the below acquisition figures to provide a syndication example. Assume that the syndicator finds an office building to purchase for $5,000,000:
| Acquisition Figures | |
| Acquisition Cost | $5,000,000 |
| Down Payment (25%) | $1,250,000 |
| Loan Amount | $3,750,000 |
| Closing Costs (5% of Loan) | $187,500 |
| Cash Required | $1,437,500 |
| Sponsor Cash Contributed | $250,000 |
| Cash Gap | $1,187,500 |
For the sake of this example, we’re only looking at the acquisition numbers – not the operating performance of the property. In this scenario, the deal requires $1,437,000 in total cash to execute, but the syndicator only has $250,000 to contribute, leaving a cash gap of $1,187,500.
To cover this cash gap, the syndicator pitches the deal to investors. He offers them minimum required returns of 8% over a five-year hold period. Once the deal reaches that 8% return hurdle, the syndicator “catches up” to his own 8% return. Returns above this catch-up hurdle go 50% to the syndicator, and the remaining 50% is split on a pro rata basis among the investors.
The above certainly isn’t the only way to structure a syndication, but deal sponsors often use a similar model.
Acquisition Fees in Real Estate Syndication
Overview
As the above example illustrates, syndicators don’t typically receive a return on their equity investment until the end of a deal. However, they put in a significant amount of work finding, operating, and disposing of a property.
To compensate syndicators for these efforts, most deals include separate fees. Often, a deal includes an upfront acquisition fee. Syndicators contribute their time and effort to find, underwrite, conduct due diligence, and acquire properties. Upon successfully closing on a property, syndicators then earn an acquisition fee.
The typical acquisition fee in a real estate syndication is 1% of the acquisition cost. However, it’s not uncommon to see fees range from 1% up to 3%, depending on the particular deal.
Acquisition Fee Example
Broadly speaking, syndicators can collect their acquisition fees in one of two ways. First, and most common, syndicators include the fee in the cash gap calculations and collect it from the investor contributions. Alternatively, some syndicators accept a deferred payment, where they collect the acquisition fee from investor distributions until the deferred acquisition fee balance reaches zero.
For example’s sake, we’ll outline the first structure – collecting the acquisition fee during closing. Using the same numbers as above, we’ll apply a 1% acquisition fee:
| Acquisition Figures | |
| Acquisition Cost | $5,000,000 |
| Down Payment (25%) | $1,250,000 |
| Loan Amount | $3,750,000 |
| Closing Costs (5% of Loan) | $187,500 |
| Acquisition Fee (1% of Acq. Cost) | $50,000 |
| Cash Required | $1,487,500 |
| Sponsor Cash Contributed | $250,000 |
| Cash Gap | $1,237,500 |
In the above figures, we have included a 1% acquisition fee – $50,000 – in the calculations. Now, the cash required increases by $50,000. And, assuming the sponsor’s contributed cash remains constant at $250,000, this acquisition fee is passed along to the cash gap. As a result, investors must contribute $1,237,500 to make the deal happen (as opposed to $1,187,500 without the acquisition fee).
Final Thoughts
Real estate syndication can be an outstanding strategy to make deals happen. But, before committing, investors should have a thorough understanding of the fee structure in a given deal, to include the acquisition fees charged by the syndicator.
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