I work for a developer (ground up) and we are repeatedly getting lowballed on Acq fees so I am trying to see what's market. As an example we are buying land for $6M, it's going to take us two years to get it to permit ready and two years to build. This will be a $100m total project cost and I know there are dev fees but we have two years of entitlement that we have overhead/need to work on/have significant risk, and our first partner we brought it to doesn't want to pay more than a 1-2% Acq fee ($60k-120k). This was also sourced off market.
Dont value add guys get 1-2% just on purchase so if they're buying a 100M value add deal they get $1-2M just for buying the deal?
Please fill me in
You get better fees if you’re syndicating to many investors as no one has all the power. Many institutions push back on the fees as they feel they aren’t justified. No one cares about your overhead. They view that as your firms problem, not theirs. This many be true, it’s just the reality. Also a 1-2MM fee is huge and most institutions won’t pay that unless the upside is crazy apparent. The most I’ve seen, on a 50m deal was 250k. The current firm I work for (developer) doesn’t even bother trying to charge acquisition fees.
Agreed on large investors negotiating down fees, but $250K on $50M is abnormally low. Most development deals are ~3.00% of total budget with the land cost potentially being carved out of the fee calculation. The total fee will then be split into an acquisition/closing fee, financing fee and development fees to provide compensation associated with achieving milestones. Even on acquisition deals you should still be at 2-3% of total budget until a certain absolute dollar figure
It all depends on the firm and the fees / promote structure as well as overall returns of the deal. If the deal can’t support an acquisition fee, there probably won’t be one. On can argue that you shouldn’t do a deal if it can’t support the fee…but let’s be real firms stretch all the time to get money out the door.
I'm on pudding's side here - my firm (developer) doesn't even bother charging acquisition fees unless we are co-GP'ing with a shop that does. I've never seen anybody of a respectable size charge more than 2% for acquisition fees, only scrappy regional shops.
OP, they are not lowballing you at 1-2%, that's just the market rate for acquisition fees. It's not based on the absolute dollar amount of the fees generally. You might be able to push for a flat $100k to get it up a little bit as a "minimum fee" if the acquisition price doesn't exceed that amount.
Yes, shops buying existing assets are getting a higher payout on the acquisition fees generally (except in gateway markets where land can be just as expensive as an operating asset), but they also aren't collecting development fees throughout the life of the project.
You would do an acquisition fee in place of a development fee?
I think he's asking for both.
How common is that? I've never asked for an acq fee but we also close with all permits in place
Different sponsors have different hot buttons. Sounds like this one is very against acq fees. I would give on the acq fee and ask for a bigger development fee/better waterfall depending on how much you need the current revenues to keep the lights on.
So you're buying $6m in land, but you want 1-2% on the whole $100m project? That's 1/3 of the land value, no one is going to pay you that up front. 2% of land cost and 4% dev fee paid as drawn is what I see as market.
Why anyone cares about your overhead is beyond me. No duh you have significant risk - that is why you get paid large promotes on the back end if the deal comes through. You are basically asking your equity investors to de-risk the deal for you while still handing you all the upside!
Gotta do the work to earn the fees...and simply buying a piece of farmland is not doing the work, doesn't matter how much potential it has! As others have mentioned, if you think you have a cracker of a deal then up the other fees, dev management, financing, sales, promotes etc. Could chance your arm at a permit success fee too if you are adding a lot of value. The main thing sponsors want to see is that you are not making money unless they are making money.
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