In this article, we will focus on one specific type of commercial real estate fee: the acquisition fee. We will outline what it is, what it covers, why it matters, and what a typical fee amount looks like. By the end, readers will understand how acquisition fees function and be equipped to compare deals based on the amount charged.
At First National Realty Partners (FNRP), we specialize in acquiring and managing grocery store anchored retail centers. If you are an accredited investor interested in our current commercial real estate investment opportunities, click here.
At First National Realty Partners (FNRP), we specialize in acquiring and managing grocery store anchored retail centers. If you are an accredited investor interested in our current commercial real estate investment opportunities, click here.
What Are Acquisition Fees?
Acquisition fees, sometimes called origination fees, are charged by a general partner to recover the upfront costs of finding, underwriting, and performing due diligence on a potential commercial investment property.
This level of due diligence requires significant time and resources. To offset these costs, private equity firms, including ours, charge an acquisition fee.
For perspective, consider our own acquisition process.
Through long-standing relationships with brokers, operators, investors, and tenants, we generate substantial deal flow. For each commercial real estate deal presented, we conduct a preliminary review to determine whether it aligns with our investment criteria. In this phase alone, we might screen 100 to 150 properties to identify just two or three that meet our standards. Each of those undergoes detailed underwriting and modeling, and we may ultimately make an offer on only one.
The acquisition fee helps recoup part of the upfront investment required to conduct this rigorous process.
What Is the Typical Acquisition Fee Amount?
The typical commercial property acquisition fee ranges from 1%–2%. The structure may vary depending on the general partner, deal size, asset class, or property type. Given the competitiveness of private equity real estate investing, acquisition fees generally fall within this narrow range.
Smaller deals tend to sit near the higher end (around 2%), while larger transactions are often at the lower end (closer to 1%). For investors, the key is understanding how the acquisition fee is calculated.
How to Calculate Acquisition Fees
Acquisition fees are expressed as a percentage, but the critical question is: “A percentage of what?” There are two primary bases: total deal size or invested equity.
- Total Deal Size:
With this method, the acquisition fee percentage is multiplied by the purchase price.
Example: A 1% fee on a $10,000,000 deal equals $100,000. - Invested Equity:
Here, the fee applies to the equity invested rather than the total purchase price.
Example: A $10M property financed with $7M in debt and $3M in investor equity would generate a 1% fee of $30,000. - Committed Capital:
In some structures, investors commit a set amount of capital even if not immediately called. A 1% fee on a $1,000,000 commitment equals $10,000.
The methodology used for calculating acquisition fees is detailed in the investment’s offering documentation, which investors should review thoroughly.
Other Real Estate Transaction Fees to Look For
In private real estate syndications, acquisition fees are just one of several charges investors may encounter. In addition to acquisition fees, investors should be aware of other fees that may apply, often referred to as “other fees,” which can significantly impact the total investment expense. Other common fees include:
- Property Management Fee: Charged for managing daily property operations. This may be handled internally by the GP or by a third-party firm. Property management typically costs 3%–10% of gross rental income, usually paid by the property rather than directly by investors.
- Asset Management Fee: Covers the cost of overseeing the investment, including budgeting, monitoring market trends, and managing vendor relationships. Asset management fees generally range 1%–2% of committed capital.
- Disposition Fee: Charged to recoup costs associated with selling the property. Brokerage commissions typically run 3%–6% of the sale price, with some sponsors charging an additional 0.25%–0.75% for disposition oversight.
- Construction Management / Development Fee: For ground-up developments, this fee compensates the GP for managing the construction and development process.
- Refinance / Debt Placement Fees: Charged for arranging or refinancing property debt. These fees can range from 0%–1.5% of the loan amount, with future refinance fees typically 0.25%–1% of the new loan amount.
When calculating potential returns, investors should include all applicable sponsor fees and other fees to form a realistic view of projected profits. Again, the full fee structure is outlined in the offering documents.
Acquisition Fees and Private Equity Real Estate: Factors to Consider
Acquisition fees are standard in private real estate syndications. Understanding acquisition fees is essential for making informed real estate investments. When assessing their value, investors should focus on two primary factors:
- Amount of the Fee: The fee should align with industry norms and should not serve as a profit center for the general partner.
- Sponsor Track Record: The sponsor’s historical performance should justify the fee, specifically a demonstrated ability to deliver strong returns net of all fees.
Investors should always review the offering documents to identify fee structures and compare them to prevailing market standards. The bottom line is that fees should compensate for necessary work, not generate excess profit.
Summary of Acquisition Fees in Commercial Real Estate
Acquisition fees are charged by real estate firms to recover the upfront costs of finding, underwriting, and closing on a commercial property.
These fees can be based on the total deal size or on the amount of equity raised from investors.
A typical range is 1%–2%, and the fee should strictly cover expenses, not serve as a profit center.
Before investing, individuals should review offering documents carefully to confirm that acquisition and related fees are reasonable and consistent with industry norms.
Interested in Learning More?
First National Realty Partners is one of the nation’s leading private equity commercial real estate investment firms. With a deliberate focus on acquiring high-quality, multi-tenant assets below intrinsic value, we seek to create strong, risk-adjusted returns for our investors while strengthening the communities where we invest.
If you would like to learn more about our commercial real estate opportunities, contact us at (800) 605-4966 or ir@fnrpusa.com for more information.
Note: This blog post is provided for general informational and educational purposes only and does not constitute investment, legal, tax, or financial advice. While the post may describe acquisition fees and other compensation structures commonly used in syndicated real estate deals, such descriptions are illustrative only and may not reflect the specific terms of any particular investment, whether with FNRP or another syndicator. Actual fees, structures, and results may vary, and past practices are not indicative of future outcomes.
Nothing in this blog post constitutes an offer to sell or a solicitation of an offer to buy any securities or real estate investments. Any investment offerings by FNRP, if made, will be conducted only through formal offering materials and only to verified accredited investors.
