Private Equity Real Estate: Fund Fees vs. Individual Deal Fees
Private Equity Real Estate: Fund Fees vs. Individual Deal Fees
Updated on July 15, 2020
At First National Realty Partners, one of our mantras is that “we look at 1,000 deals and choose ONE.” We believe that this is one of the keys to our success and it requires a talented team of multidisciplinary real estate professionals to do it. Once identified, it takes another team of equally talented professionals to negotiate the price, raise the equity, source the debt, close the transaction, and manage the property once closed. We make a tremendous investment in our team and believe that they are the engine that drives our progress. However, they are expensive and, to support their work, it is necessary to charge administrative fees.
For an investor thinking about allocating capital to a professional real estate investment manager, fees are an important consideration and they should be simple, clear, and structured to align the interests of both the investor and the manager. Unfortunately, it isn’t always easy to make a comparison from one manager to another. To further complicate matters, the fees can be different depending on whether the manager is structured as a fund or as an individualdeal syndicator.
Fund vs. Deal
In order to compare fees accurately, it is first necessary to determine if the investment is structured as an investment fund or as an individual deal.
In a fund structure, a manager pools capital from multiple investors and deploys it across many investments of their choosing to increase diversification. The “called capital” fund structure is popular, where an investor commits capital and the manager “calls” for it when needed. Investor equity is paired with debt to magnify the impact of the fund.
In an individual deal, the investor is allocating capital to a specific transaction and investing in a specific property. As such, they have more discretion in choosing the deals they like. Depending on the transaction structure, the fees charged by the manager may vary.
In a fund structure, there are three common fees to consider:
Upfront fees: This is a one-time fee and is charged on the total amount of committed equity. It is used to pay for the costs associated with setting up the fund like legal, marketing, fundraising, and investor relations. Depending on the manager, the fee could range from ~1.0% to ~3.0% and should be clearly described in the fund’s investment and/or marketing documentation.
Asset Management fee: Instead of being charged up front, the asset management fee is charged on an annual basis and is used to pay for the administrative costs of running the fund including things like salaries, rent, and accounting. Typically, the fee ranges from ~1.0% to ~2.0% on committed funds.
Admin fees: This is a recurring fee, on top of the Asset Management fee, that is used to pay for the costs associated with running the specific fund. It could include things like tax reporting and the costs associated with acquiring technology tools and systems. Again, depending on the manager, the fee could range from ~.10% – ~.25% annually on invested capital.
To fully understand a fund’s fee structure it is critical to read the investment prospectus and all of the fine print associated with the offering materials. It is also important to consider the total fund fees within the context of performance. One manager may charge a total of 5% and have a track record of delivering 10% annual returns while another may charge 7%, but with a track record of delivering 15% annual returns. In such cases, it is important to determine if the higher fees are worth it.
It can be frustrating and/or confusing to compare fund fees to deal fees because the terminology tends to be inconsistent between the two. Chief among the differences is the fact that many fund managers charge their fees based on total equity invested, while individual deal syndicators charge their fees based on deal size. As such, it is occasionally necessary to do a “conversion” of sorts to ensure an accurate comparison. A fee may look small relative to deal size, but may actually be more expensive relative to equity invested. The difference may seem minor, but it can make a difference over time.
Deal fees typically include the following:
Acquisition fee: For the task of reviewing dozens of opportunities to find a suitable one, a deal syndicator may charge an acquisition fee that ranges from 1.0% to 2.5% of the total deal amount. The money is used to pay for the costs associated with the tasks above for both the one deal that worked and the dozens that didn’t.
Organizational fee: Every time a syndicator does a new deal, they’ll have to create an LLC, open a bank account, create a marketing package, and raise capital for it. To pay for these activities, they charge an organizational fee that can range from .5% to 2.5% of invested capital. It should be noted that this fee is commonly buried in the fine print or lumped together with other fees. As an investor, it is a good idea to ask the manager for a breakout of their organizational fees and to make sure that they are in line with their peers.
Asset Management fee: Like fund managers, deal syndicators also charge an annual asset management fee that can range from .5% to 2% of total invested capital.
Admin fees: To support the administrative activities involved with running the deal, syndicators charge a fee to pay for things like accounting, reporting, tax preparation, and management of distributions to all investors. Typically, the fee ranges from .1% to .25% of invested capital.
Again, it is important to read all deal documents closely to understand the proposed fee structure and to be able to compare it to other options. Pay close attention to whether the fee is charged on invested capital (equity) or on the total deal size.
Interested in Learning More?
Whether investing in a deal or a fund, it is important to understand the fee structure and its potential impact on returns. Fees should be set up to incentivize the manager to maximize the return for their investors and should be clearly explained in the offering documents. Finally, fees should be considered relative to performance. On some occasions, it may be worth it to pay more for an elite track record of returns.
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you’d like to learn more about our investment opportunities, contact us at (800) 605-4966 or email@example.com for more information.
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