From the desk:Marketing / PPC Agency (Real Estate)

Marketing spend is buried inside the acquisition fee. Is that normal?

Reading through a deal package on a small multifamily syndication and there's a line I haven't seen broken out this way before. The sponsor charges a 2 percent acquisition fee, and separately lists $46,000 of "marketing and lead generation" in the sources and uses on a $4.1 million purchase.

When I asked, they said that's a twelve month prepay to a marketing agency that finds them off market multifamily, and they allocate a share of it to each deal they close. Last year they closed three deals, so roughly $15,000 a deal, except this one shows $46,000, so either the allocation isn't per deal or I'm misreading it.

What I'm unsure of: whether investor capital should be funding a sponsor's deal sourcing pipeline at all, or whether that's what the acquisition fee is supposed to cover. And whether $46,000 on a $4.1 million deal is a real cost or a way to move money.

Decision is whether I ask for the agency invoice and the allocation method before I commit, or whether that's an unreasonable request on a check my size.

Answer

1dpatel_reCS4A

Asking for the invoice is not unreasonable at any check size. The worst outcome is they say no, and that's information.

On the substance, the acquisition fee is conventionally meant to cover the sponsor's cost of finding, underwriting, and closing the deal. Sourcing costs sitting on top of it as a separate line is double dipping unless the operating agreement explicitly allows reimbursement of marketing expense, in which case it's disclosed and you're just deciding whether you like the terms. Check the agreement language, that's where the answer is.

2 percent of $4.1 million is $82,000. Adding $46,000 of sourcing on top means the sponsor collects $128,000 at close, over 3 percent. That's high for this size. Whether it kills the deal depends on the returns after it, which you can model, but I'd want the arithmetic to hold with the fee in it rather than being told the fee is normal.

4 replies

1ehernandez74PO2BPRO5

How would you even verify the allocation? If the agency bills a flat $46,000 a year and they closed three deals, the honest allocation is a third each. Charging the full year to one deal means the next two deals get it charged again, unless there's a written method. I'd ask for the method in writing before the invoice.

2laurenkim53Passive

Smaller markets, smaller deals here, but I've seen sponsors treat marketing as an ongoing operating expense at the management company level and never touch deal capital with it. That's the version I'd rather see. Once sourcing costs are capitalized into individual deals, every deal carries the cost of the deals that didn't happen.

1renee_dubois Get yours

@hollow's last sentence is the real issue. $46,000 of marketing bought them a pipeline, and some of that pipeline was deals they passed on. Investors in this one deal are paying for the passes.

That's not automatically wrong, it's how a lot of businesses work. It should be labeled and capped though. @canton, I'd ask two things. What's the total marketing prepay for the year, and what's the written allocation across closings. If the answer to the second is "we decide per deal," I'd read the whole fee section again with an attorney rather than just move on.