Fee structure for sub $10m value add
Despite my title on here - I've got about 7 years experience in REPE/Development. I've been finding deals around the $10m - $15m mark that look promising (value add deal). I don't have the money to pull this off.
The plan is I raise $5m through a syndication for a deal. I've done a bit of research for lower end RE fees but there isn't much out there. My fee structure would be:
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3% ACQ fee
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2% IM Fee (on Equity)
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2% Disposal Fee
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Typical 20% Carry figure on LP profit.
Is this fee structure reasonable?
I would check with whichever lawyer you plan on using to structure all of this. They would know best for market fees of deals in this size range and capital structure make up.
Depends on market and investor profile. As the other poster said, ask your lawyer (it's worth paying someone good to do this).
Generally speaking, 3% acquisition/disposition fees feel high. 2% maybe, but 1-1.5% is more typical in my experience. Your AM fee could be higher at 3%, and should be able to bake in increases based on CPI.
In terms of your waterfall, 20% carry over what pref? Need more details on the deal to chime in here. Pref is going to vary depending on product type. Multifamily/industrial you'd only need 6-7%, but 8% for office/retail. Think you could push for 25-30% over a 6-7% pref if MF/ind, again market dependent.
Is your experience working with/for a firm, or on your own? The distinction will make a big difference in your fee structure. If this is going to be your first deal you’ve lead and invested in as a partner (or at least first deal that’s this significantly sized), I’d recommend lowering across the board except the promote. The experience and “resume” you’ll build will be extremely valuable as is- you may need to sacrifice on your initial profit to get a consistent partner on board/build rapport. Now, if you have experience leading and investing in deals, and running all aspects of the deal, I’d say make your fee structure a discussion with your partners. What’s more important to you and to them? Maybe you need the up front fee to get more equity into the deal, or you want to get a better promote for outperformance. The more communicative you are, the better.
My last thought is to always show the trade off for your return to theirs. If your extra promote that drives your IRR up 15% is only a .1% off the LPs profit, demonstrate that as defense for your performance and the effort you put forth for the deal and their returns.
My advice is not overly practical, but still merits a discussion...
Just get the highest fees you can negotiate. Most HNW investors aren't industry professionals and probably won't say "these aren't industry standard! I will never do a deal with you!". They are probably doctors, lawyers, successful sales people, tech, etc. and aren't as fluent in REPE/dev fee structures. Am I saying rip them off? No. (Well maybe, I wouldn't ever turn down money if they are willing to give it). But negotiate and find a middle ground that you are both happy with, but make sure you have a hard line at a floor for fees.
This is the answer. I've done 20 deals in the last 3 years in the $1-10MM range, so slightly smaller, but all HNW investors. All they care about are their returns, not really what the exact %'s are. All of my deals are 7% or 8% pref, 40-50% promote, 3-5% acq/dev fee, AM fee is 2% of revenue, 1% dispo fee.
That’s awesome. If you don’t mind me asking, how’d you get started doing your own deals?
Nice work - so you would charge both acq and dev fee? It'd be great if you could do an AMA
Mind sharing what % of the equity you are putting in?
I find this way off base. I would keep it as simple as possible for my first few deals, something along the lines of a 30/70 split after an 8% hurdle. Anyone who is doing any material fundraising in REPE would see that fee chart and gasp. If your goal is to build a REPE business, starting by skinning your LPs for every dollar is not a good way.
Capital is the life blood of commercial real estate, protecting those relationships and building and maintaining trust is the name of the game.
Agree here. If these "doctors" are investing in your deals for the first time, they're likely seeing other deal flow and a lot of them will focus on what the fees are.
After you've made them a bunch of money they'll likely look at that less and less, but on the first deal, 100% they're going to be focused on what you're making.
edit - how did I get a silver banana on this as soon as I posted it?
If you've got no personal experience yourself with private capital, fee structure seems a bit high.
3% acquisition & 2% disposition fee for your first deal on your own? pretty high, usual is 1-1.5%.
2% AUM fee for equity raised is ok.
carry @ 20%... seems high with no pref.
I've participated in a varying range of syndicated deals over the past 4+ years and usually when I see a fee structure like that, I just think how the GP is trying to fee out and roll the dice with OPM. As others have said here, focus more on executing the business plan well and your investor base will grow where a bump in fee doesn't cause anyone to flinch because they're confident you'll perform.
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