Investing in a real estate syndication opens the door to passive income and large-scale deals you might not tackle alone. But one of the most crucial and sometimes confusing aspects of syndication is the fees charged by the General Partner (GP). Knowing how fees work helps you spot fair deals and avoid those that might erode your returns.
Let’s dive into the world of syndication fees and how they affect your bottom line.
1. Why Syndication Fees Exist
Fees aren’t just about profit for the GP—they serve real purposes:
Compensating the General Partner (GP)
Gaining access to investment opportunities, negotiating deals, and overseeing the asset takes significant time and expertise. Fees help compensate the GP for these efforts.
Covering Operational Costs
Running a syndication involves legal costs, accounting, reporting to investors, and property-level management. Fees help cover these ongoing operational costs.
Aligning Incentives
Well-structured fees ensure the GP’s incentives align with investors’ goals. For instance, a performance-based “promote” encourages the GP to maximize returns.
2. Common Types of Real Estate Syndication Fees
Acquisition Fee
Charged upfront (often 1–3% of the purchase price), this fee compensates the GP for sourcing, underwriting, and closing the deal.
Asset Management Fee
A recurring fee (usually 1–2% of gross income) for overseeing the property’s day-to-day performance, financial reporting, and executing the business plan.
Disposition Fee
Paid when the property is sold, this fee (often 1% of the sale price) compensates the GP for handling the marketing, negotiations, and closing of the sale.
Refinance Fee
Some sponsors charge a fee (0.5–1% of the refinanced loan amount) for managing refinancing activities, which can help return capital to investors.
Loan Guarantor Fee
If a GP personally guarantees a loan, they may charge a fee (typically 0.5–1% of the loan balance) for taking on the risk.
Organization/Administrative Fee
Covers legal formation, document preparation, and ongoing administrative costs. This fee is usually a one-time cost or a modest annual charge.
3. Understanding the Promote and Profit Splits
Typical Structure
The “promote” is the GP’s share of profits above a certain return threshold. For example, after investors receive an 8% preferred return, profits might be split 70/30 (70% to investors, 30% to the GP).
Waterfall Distribution
A waterfall structure divides profits across tiers:
- Investors receive preferred returns first.
- Next, the GP catches up on their promote.
- Remaining profits are split according to agreed percentages.
Properly structured waterfalls ensure investors are rewarded before the GP profits significantly.
4. How Fees Impact Investor Returns
When Fees Are Reasonable
Reasonable fees are justified by the GP’s expertise and workload. A good sponsor’s value often outweighs the cost of fees because they help:
- Source quality deals
- Increase property value
- Execute business plans efficiently
When Fees Are Excessive
Excessive fees can erode investor returns, even in profitable projects. Watch out for:
- Double-dipping fees (charging for the same service in different ways)
- High upfront fees with little performance risk for the GP
- Disproportionate promotes without sufficient hurdles
What to Watch For
- Compare fees against industry norms.
- Review the OM’s fee section closely.
- Ask for transparency in how each fee is calculated and justified.
5. How to Evaluate Fee Structures in an OM
Questions to Ask
- Are fees competitive with industry averages?
- What services do these fees cover?
- Is the promote performance-based?
- Are any fees hidden in complex language?
- How do the fees impact projected returns?
Compare Across Deals
Don’t evaluate fees in a vacuum. Compare:
- Acquisition fees among different sponsors
- Asset management fees for similar property types
- Waterfall splits in deals of similar size and complexity
Remember: Low fees don’t automatically mean a better deal. A skilled sponsor who charges fairly can generate higher overall returns than a low-fee operator who underperforms.
Final Thoughts
Understanding syndication fees empowers you to separate strong investments from those that might quietly chip away at your profits. Read the OM carefully, ask questions, and know the market averages. When fees are structured fairly, both investors and sponsors win.
True/False: Did this blog help you better understand real estate syndication fees? 
