Best place to include asset management fee in proforma?

Long time lurker here. Currently enrolled in a MSRE program looking to make a career switch. Been helping out with the modeling on a few deals. Just curious where it is most appropriate to include an annual broker-dealer fee (1.5% of initial equity) in the proforma cash flows? Would you include it below NOI but before equity, before tax cash flows, or would you not include until doing your cash flow available for distribution calculations?

Any insight as to industry norm (and why) would be much appreciated.

Hopefully, the question makes sense. Thanks

Private Equity Interview Course

  • 2,447 questions across 203 private equity funds. Crowdsourced from over 500,000 mem.
  • 9 Detailed LBO Modeling Tests and 15+ hours of video solutions.
  • Trusted by over 1,000 aspiring private equity professionals just like you.

Comments (22)

Feb 7, 2019

While I am not familiar with "broker dealer fee" I always include management fees above the line, that is, in the NOI.

Feb 7, 2019

Your question asks about an asset management fee but your question involves a broker fee.

If it were me, I would include it as a closing cost. Therefore, it would be paid with Equity or Debt at time of close.

Most Helpful
Feb 7, 2019

To cover all our bases, let's clarify the following:

Broker Fee: if you're referring to the fee that an investment sales team/broker is charging for facilitating the deal, then that would go into your acquisition closing costs to be paid before month 1 of your cashflows. This is a non-recurring fee.

Property Management Fee: this is the fee you're paying a 3rd party management company (or yourself from cashflows & charging your LP equity). This gets pulled from cashflows and factors into your final NOI.

Asset Management Fee: this is the fee you're getting paid as a sponsor or paying as an LP to the sponsor for managing all aspects of the deal. This is typically a % of total equity invested in the deal, or of cash flows, etc. This goes below "the line" (NOI) and is taken out before your net cash flows (equity free cash flows). This is in the same section as your debt service.

    • 5
Feb 11, 2019

To get even more detailed, I (as an LP investor) would structure the asset management fee below debt service so Sponsor will not be paid any $ until debt service is fully covered if we pay asset management fees at all.

We hate asset management fees as these feel like a fee grab (especially if Developer has in-house property management and is already getting paid there). Strategically, if I were the developer I would negotiate slightly higher development and construction management fees in lieu of asking for an asset management fee.

Feb 7, 2019

I think his question is that a broker is asking for a reoccuring fee of 1.5% of equity (which seems really really high). In the case I would carry it below the line, but I really hope they brought you a great deal for that type of fee.

Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Feb 7, 2019

Thank you all for your responses. Obviously, it was too late when I was trying to put this question together last night. To clarify, this is a recurring fee that a broker wants to charge annually for bringing equity to the deal. From what I am gathering here, it sounds like it should be accounted for below NOI in the same section as debt service.

alyoop928 -- you are right on the money. I am actually helping the broker underwrite before taking to potential equity providers. In your experience, what is a normal upfront fee on this type of service, and what is a normal recurring fee?

Thanks again to all who have commented.

Feb 7, 2019

This is definitely below the line since it does not affect NOI (operating cash flows of the asset). Also a 1.5% fee is extremely expensive if you think about a general 5 year hold that comes out 7.5% equity fee, kind of ridiculous when equity placement fees tend not to exceed 3 points. You could also kind of think of this like a pref return to his equity investment. In either case, note that this fee would always be subordinated to debt payments so if you're taking out in the debt section, be sure it comes out below debt principal payments as it would otherwise be subject to fraudulent conveyance in a CH11 (can't pay out the equity before servicing your debt)

Feb 8, 2019

Just want to point out that in general, an asset management fee does not have to come out below the line. Its often advantageous to put it above the line, alongside property management fees, in order to lower the income to the project (e.g. less offset to the property level depreciation).

Feb 8, 2019

Let me see if I follow this correctly. You are saying to put Asset Management fees above the line, so that you can have high depreciation so that your net income can be lower?

This lowers NOI and keeps net Cash Flow the same but lowers Net Income?

I have always seen AM fees as the next line under NOI.

Feb 8, 2019

Perhaps you should study concepts first before replying the damn purpose of noi is a reflection of OPERATING cash flows asset MGMT fee does not qualify as that and thus has no place above the noi line.

    • 1
Feb 11, 2019

Property management fee is above the line, asset management fee is below the line (with other partnership expenses).

This is standard industry practice...

Feb 11, 2019

Yep. I also don't usually see Asset Management fees above the line but there is no reason it can't be. It's just standard practice to put it below the line.

That being said, it can lower your taxable income to have it above the line.

Feb 7, 2019

It depends on the amt of required equity / complexity of the the deal. 2 - 3% seems about right.

Although if it is a large raise handled by like.. idk... HFF securities I've heard they charge 4%, Anyone ever hear a figure that high?

Feb 7, 2019

I've never heard of an equity broker receiving an annual fee.

Feb 7, 2019

Neither have I. I'd meant one-time fee.

Feb 7, 2019

should be one time fee

Feb 7, 2019

For those commenting regarding the broker dealer fee, this is a fee that has to do with private equity funds that raise money through private placements of HNW capital in a SEC Reg D 506(c) fund. You would not see this on the development side (unless you were to raise equity using a Reg D fund), because this isn't applicable to JVs.

OP, fees should be applied below BTCF. My fund looks at returns before fees and net of fees.

So it would flow like:

EGR
-OpEx
=NOI
-Leasing Costs
-CapEx
-Debt Service
=BTCF Before Fees
-Asset Management Fee
-Other Ownership Fees
=BTCF (Property Level)
-Any Fund Fees (if you're including some sort of trail BD fee in the proforma it would go here)
=BTCF (Fund Level)

We don't book our broker dealer fees at the property level on each deal. That kind of stuff is front loaded when the equity is raised and any available equity is already net of fees. In your case, I would bifurcate in the acquisitions budget the basis before fees and after fees, and include the BD fee on the equity in the fund level basis.

    • 1
Feb 8, 2019

What is BTCF? Below the Cash Flow?

Feb 8, 2019

Before Tax Cash Flow

Feb 8, 2019

Gotcha, thanks. I use Levered Cash Flow and After-Tax Cash Flow .

Feb 8, 2019
    • 2
Feb 11, 2019