On a paper $4M raise, does the acquisition fee actually stay with the sponsor?

A useful exercise for anyone who has only read about promotes in the abstract is to build a paper deal and pay the sponsor in the spreadsheet. Here is one to work through. Take 60 units at a $6.5M purchase, a $4M equity raise covering down payment, capex, closing and reserves, and a $4.5M loan. Fee assumptions drawn from what commonly shows up in offerings: 2 percent acquisition fee ($130k at close), 1.5 percent asset management on invested equity ($60k a year), 1 percent disposition. An 8 percent pref, 70/30 split above that. Year one shows $190k of fee income and it looks great on the line. Then start listing what has to come out of it, and the $130k stops looking so comfortable. Costs of doing the raise itself, before anything else: a 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. Put placeholder numbers on those and the exercise gets honest fast. So the question worth putting to the room. Is the acquisition fee generally income to the sponsor, or is it mostly reimbursement that goes straight back out the door? And what is missing from that cost list entirely?

hannah_west29 SS2APRO 16

Answer

monica_tran3 SF2APRO 15

Sponsors who have been through a first raise tend to give the same answer to this question, and the K-1s bear it out. 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 will pay for inspections on two properties you do not 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 is not 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 are raising, and that part is not optional.

monica_tran3 SF2APRO 15

2 replies

jordan_ellis2CapitalPRO

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.

jordan_ellis2CapitalPRO

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