RE Monkeys, need some boots on the ground market insight. Looking to allocate to some value add Multi Family private deals and was very surprised on what sponsors are looking for in terms of fees/promote. Is this indicative of what the market is like? If so good time to be a GP. For context this is a blended sample of $25-100M acquisitions, 6.5-7.5% entry cap rate, 10-20% of purchase price towards rehab/improvement
Acquisition fee: 0.6-1% of purchase price
Property management fee: 3-5% per annum of gross rent
Debt refinance fee: 1% of loan proceeds if refinanced post close
7-10% pref, 25-30% promote to 15% IRR, 30-50% promote from 15%+ and beyond
GP investment 5-10% of the equity of the deal
Based on the highest ranked content on WSO, the terms you've mentioned for fees and promote structures in REPE deals seem to be within the range of what's currently observed in the market, especially for value-add multifamily deals. Here's a breakdown:
Acquisition Fee: Typically, acquisition fees range from 0.5% to 1% of the purchase price, so 0.6-1% is in line with market standards.
Property Management Fee: A fee of 3-5% of gross rents is also standard for property management services.
Debt Refinance Fee: Charging 1% of loan proceeds for refinancing is a common practice, though this can vary depending on the complexity of the deal and the work involved in securing new financing.
Preferred Return (Pref): A 7-10% preferred return is typical in private equity real estate deals, serving as a hurdle rate before profits are split.
Promote Structure: The promote structure you've described, with 25-30% to the GP up to a 15% IRR and then increasing to 30-50% beyond that, is aggressive but not unheard of, especially if the GP is confident in delivering high returns.
GP Investment: GPs typically co-invest in the deal to align interests with LPs. A 5-10% equity investment by the GP is reasonable and demonstrates commitment to the deal's success.
Remember, the specifics can vary based on the deal's size, risk profile, and the sponsor's track record. It's also important to consider the competitive landscape and investor appetite when finalizing terms. If you're seeing these terms consistently across deals, it could indeed be a sign of a sponsor-friendly market environment. Always perform due diligence and consider negotiating terms that align with your investment criteria and risk tolerance.
Sources: Promote from $500k to literally $0 - what do those who have been through a RE downturn recommend?, Let’s talk REPE Comp, Differences between CRE vs REPE, Let’s talk REPE Comp, REPE compensation
This seems market other than the property management fee. Is it to the developer or it's an estimate to pay the property manager? Is that mixed in with an asset management fee?
Depends on the size of the properties but if huge 2% pm, If smaller 3% sometimes 4%. am fee of 1.5% is common too
Those promote splits are very much on the aggressive side of the spectrum. And they're saying 6.5-7.5 going in cap rates? Sounds like they're either bad at math or bad at telling the truth, cap rates (except in very tertiary areas) aren't that high...yet.
These pref ranges seem market.. anyone quoting going in 7 caps on 100mm deals is either lying or a rainmaker
Do you have a background in private investing, or do you work at a REPE group today?
If not I would shy away from groups that are pushing the metrics / fees you outline above.
First of all - the cap rates, deal size, and business plan you outline do not jive; we would need more details but it smells fishy.
If you really want access to private opportunities I would ask why? The terms you outline above do not sound attractive given where today's market is; I would rather buy a house as an investment or put money in high yield liquid securities.
Also - why would you pay someone a 7% preferred return when you can find bonds that deliver this yield? I would not accept a preferred return below a 10, I would not pay someone to refinance the loan (thats insane actually), and the promote is stupid too.
Who is selling this to you? Please throw their name out on here actually, they need to be found out and avoided LOL .. slowly getting more annoyed the more i think about this
I work at a hedge fund. Unrelated to REPE, this is a personal investment. Pm me for details on the group. Why does anyone invest in REPE? Deals that Pencil high teens IRR with excellent tax efficiency
Ah I see.
I'm almost certain that the metrics outlined will not generate a net-IRR to the LP investor above 15%. The 25% promote above a 7% IRR would heavily dilute the returns, and you would have to be swinging for 25%+ gross level returns
If you work at a HF, I would ask your boss or CEO if you're comfortable, if they have any friends in the industry where you could get access to more institutional platforms.
The platform described sounds a bit retail-esq; they market to retail investors as alternatives to 401k's, and charge huge fees while delivering market-avg returns. There are a ton of these platforms imploding right now, the forum does a decent job of roasting them.
Just my opinion..
7% pref is pretty market. You only pay a 10% or higher pref if it’s a development deal. Also - nothing wrong with paying refi fees. Someone has to do the work. So someone has to get paid for it. This is a business not a handout. GPs need to charge a combination of fees which allow them to pay the staff on their platform. You could do this by charging different fees or 2% of equity AUM plus acquisition fees. It’s all fungible but need to charge fees. If the GP goes broke, everyone loses…
GP's get paid handsomely for performance lol... not simply running the asset, which they get paid AM fees for. If an operator told me "I'm going to run normal course of business and refi this asset bc it is in the best interest of the investors, which I am a part of, and I'm going to charge all of us 1% to do this" ... I would go nuts lmao
amen. that guy has no clue what he is saying
Sorry but if someone told me they were charging a refi fee I would laugh in their face. If you’re underwriting a long term hold this is part of the business plan and the sponsor makes money through the asset management fee to run the asset
Than what would you say is market? These terms do not seem wildly out of proportion at all unless they are not managing the property.
Acquisition fee / property management fee seem above market
When did a 1% acquisition fee become high for market? Doesn’t Rose48 charge like 3% lol?
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