So I understand there are many ways to have AM fees. The 1% - 3% (depending on deal) on total rental income makes the most sense to me.
BUT what are the arguments for the 1%-2% on AUM? Equity Invested? Capital Contributed?
Also would you have to conduct a fair market value of the assets every year to see what your AUM fees would be?
Lastly, what are the deal size hurdles (or rules of thumb) when asking for AM fees on total rental income? Over $10M rent = 1% Between $10M - $5M rent = 2% Between $5M - $3M rent = 3% Under $3M rent = 4%
All insights are welcome & appreciated!
I never understood why people do AUM fees as a % of EGI. They just won’t be large enough to build a business on. It’s why PM is such a low margin business.
Funds charge AUM fees on equity raised for a reason. Syndicators should do the same. They don’t bc they don’t have great access to capital - so lowering the fee increasing deal returns to investors helping them raise money.
What is the exact reason why syndicators should charge a % on equity raised?
(How do these activities/incentives align?)
So you mentioned, that syndicators don’t charge these fees because of their limited ability to raise capital and giving investors better returns? So why don’t investors stay away from funds & do more syndicate deals?
.. seems like syndications are better from a LP investor position..right?
Most people don’t have access to invest in a fund. So they invest with a syndicator.
Pension Funds invest with funds because they can write a $50M check and the fund has institutional quality and management. Many syndicators do not.
Syndicators can be better and can be worse. It’s not always about fees (or lack thereof). Some syndicators charge higher fees than funds. If you’re consistently churning out 2.0x Equity Multiples over 3-5 years and making boatloads of money, you can charge high fees.
The reason I’m saying you should always charge as a percent of equity for fees is that the syndicator needs to stay in business. If you do a 175 unit deal with $1600 average rent and a 2% fee on EGI assuming 5% vacancy, the syndicator makes $63,000 in fees. That’s great but you need to build a platform to hire and stay in business. The same deal assuming a 5% cap and 1.5% fee on equity with 65% debt is $201,000 in fees (assuming 40% expense). Much easier to build a bigger business with bigger fee income (of course.) Syndicators and developers are in the fee business not the investment management business - as much as they want to say they are. Sure-if you don’t make money for LPs, you can’t raise more money and make more fees and do deals; but you make your money in the fees when you invest 5% of the equity, not the equity.
Sure - you have a promote. But that’s only at the end if the deal performs. You shouldn’t be covering overhead out of promote. That is profit.
I can pretty much guarantee you that any developer and syndicator with true scale in industrial/retail and officd (when office was a better business pre Covid) was making a boatload of their fee income via leasing commissions (assuming they brought leasing in house) bc it’s all about fees. Syndicating anything with large leasing commissions (AKA not multi, seniors, self storage, etc.) is a much better business to build off of once you get scale. Why - more opportunities to generate fee income.
Generally speaking, 1% of equity if you have an LP with any weight to throw around - this is negotiable between 1% on initial equity commitment, total contributed equity, or remaining equity.
Sometimes with smaller LPs or if it is a new LP you want to work with you might charge a larger (3-4%) percentage of NOI/EGI to get a foot in the door. Usually only if it is a larger property where the fees generated are still sufficient to keep the lights on though.
What do you mean by “get your foot in the door” in this situation?
What are the deal size hurdles where the % would change for the EGI fees?
e.i. Like when would you charge: 1-2%; 2-3%; 3-4%; 4-5%?
Foot in the door as in doing a first deal with a new LP in hopes of forming a long term relationship. To secure that first deal you might take a lower fee that is contingent on asset performance (i.e. a percentage of NOI or EGI instead of a percentage of managed equity).
Can't speak to deal sizes. I've only ever seen 3-4% of NOI and 1-2% of equity as fee structures at shops I've worked for.
Does anyone have market reports or studies showing AM fees by deal size? Looking for support in negotiations.
If someone had the same for Development fees that would be fantastic as well
Currently charging AM fees based on revenue, with the thought process being incentives are aligned - increased income results in higher fees, not just amount of equity raised or marking the portfolio up based on market values. Admittedly, the fees are lower because the equivalent fee as a % of income would just look too high at 5-6% of income or more. At the end of the day, the fee has to still provide adequate cash flow left over for investors but also can’t optically appear greedy in % terms, even though 2% of equity might be the same as 6% of revenue, agreed?
A couple of questions on AM fees as % of equity:
Is it typically on initial capital contributed or current equity position where debt pay down and possible mark up or down of value would affect the fee?
What happens in a refinance if you’re able to give back all or some of the equity? Does the fee go down or get based on another metric? Maybe include a minimum that’s equivalent to 1-2% on the initial equity?
Doesn’t fee as % of equity somewhat incentivize the sponsor to raise more equity than necessary/utilize lower debt? Not that it’s a bad thing to leverage it more conservatively, just thinking through pros and cons and potential misalignment of interests.
Bump.
Also do the funds or sponsors have to conduct a fair market valuation every year to see where the AUM fee would stand?
(Assuming fees % are based on AUM)
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