From the desk:Syndications: GP / Sponsor

Built the sponsor side of a hypothetical $4M raise on paper. Does the acquisition fee actually stay in your pocket?

I'm nowhere near doing this, I just wanted to see the GP economics from the inside instead of reading about promotes in the abstract. So I built a fake deal and paid myself in the spreadsheet.

60 units, $6.5M purchase, $4M equity raise (down payment, capex, closing, reserves), $4.5M loan. Fee assumptions I picked from things I'd seen: 2% acquisition fee ($130k at close), 1.5% asset management on invested equity ($60k a year), 1% disposition. 8% pref, 70/30 split above that.

So year one I'm looking at $190k of fee income and it looks great on the line. Then I started listing what has to come out of it and I stopped feeling good about the $130k.

What I've got so far as costs of doing the raise itself: securities lawyer to draft the offering, an entity or two, third party reports in diligence, a market study, accounting and K-1 prep every year, and whatever the fund admin platform charges. I don't have real numbers for any of it, I'm using guesses.

So the beginner question. Is the acquisition fee generally income to the sponsor, or is it mostly reimbursement that goes straight back out the door? And what did I forget to put on the cost list entirely?

Answer

1monica_tran3SF4CPRO6

I've been an LP in three deals and I asked two of those sponsors this exact question, so here's what they told me plus what I saw on the K-1s.

The acquisition fee is income in the accounting sense, and most of it is gone within a year. On a raise your size, budget something like $40k to $70k for securities counsel to draft the offering and the operating agreement, and that range moves a lot by state and by how much custom work you want. Entity formation and registered agent, a few thousand. Third party reports on 60 units, appraisal plus property condition plus environmental, easily $12k to $20k. Fund admin and annual tax prep, $10k to $18k a year once you have 25 investors expecting K-1s on time. Then the dead deals. You'll pay for inspections on two properties you don't buy for every one you close, and nobody reimburses that.

Add it up and your $130k is roughly covering the cost of becoming a sponsor for the first time. Year two the asset management fee starts paying for actual work.

Things missing from your list. Loan costs and the personal guaranty: on a $4.5M loan your name is likely on recourse carve-outs at minimum, and that exposure isn't priced anywhere in your spreadsheet. Insurance for the entity and for you. Investor relations time, which is not a cost until month 14 when distributions dip and you spend two weeks on the phone.

The promote is the pay. Fees keep the lights on while you earn it. Anything touching the offering documents needs a securities attorney licensed where you're raising, that part isn't optional.

2 replies

1jordan_ellis2ActivePRO6

I've been running the same exercise for months and the line I always got wrong was time. Six months from first look to closing, at zero income, before any of that $130k arrives. If you have a job that's fine, if you quit the job to do this it's the whole story.

I don't know the answer on the acquisition fee. Every sponsor I've asked says "it covers costs" and none of them have shown me the costs.