Fee stack in a 240-unit PPM: asset management is 2% of gross revenue, not equity. Is that the tell?

Do the arithmetic, it's the only way to compare anything.

Gross revenue on 240 units at, say, $1,250 average with 7% loss to lease and vacancy is roughly $3.35M in year one, call it $3.9M by year five. 2% of that averages about $72k a year, so $360k over five years.

Acquisition $680k. Construction management 5% of $4.8M is $240k. Admin $150k over five. Disposition on a $44M sale is $440k. Refinance fee unknown, assume zero.

That's about $1.87M of fees against $12M of equity, so 15.6% of your capital goes to the sponsor over five years regardless of performance. Roughly 3% a year. Then the promote sits on top.

2% of gross revenue isn't unheard of but the range I see more often is 1.5 to 2 percent of collected revenue, or 1 to 2 percent of invested equity. Equity-based is the version that doesn't grow just because rents grew.

The number I'd actually challenge is the construction management fee stacked on top of a general contractor who already has overhead and profit in the hard cost number. Ask whether the GC's fee schedule is separate. Sometimes it's an honest supervision fee, sometimes it's a second markup on the same work.

Basic question because I'm still learning this vocabulary. If the asset management fee gets paid monthly out of operations, does it get paid before or after the LPs get their 8%? Because if it's an expense above the line, the pref could be accruing unpaid while the sponsor's fee goes out every month. That reads very differently than a fee that waits.

@vellum that's the question I'd want answered too. Above the line means it's an operating expense and it gets paid no matter what.

On construction management, 5% of hard costs is the piece I know a little about from the vendor side. Somebody has to write scopes, walk units, and approve draws, and that's genuine work that costs money. What I'd ask is who does it. If the sponsor has an in-house construction person on payroll, the fee is paying that salary. If they hire a third party owner's rep and charge the 5% on top of that, you're paying twice for one job.

Different angle. On land deals the fee stack is usually thinner and the promote is fatter, because there's no operating revenue to charge against and the whole return is at the back end. I like that shape better as an investor. The sponsor eats first only when everybody eats.

What @juniper found is the opposite shape. $1.87M of certain money and $12M of uncertain money in the same deal. The sponsor's downside is capped at looking bad, which is a real cost but not a financial one unless they've co-invested. @juniper, does the document say how much the sponsor is putting in alongside? That single number changes how I read every fee above it.

Seconding @plumb on the double markup. I've bid work on value-add units and the schedule I hand over already carries overhead and profit. If an owner's construction manager takes 5 percent of my number too, the money is coming from the same place and the units aren't any nicer for it.

Ask for the capex budget line by line, not the $4.8M total. You'll learn more from the per-unit interior number than from the whole fee argument.

I don't need the perfect fee structure, I need to know if this one is unusual. From what @canton laid out it sounds ordinary but toward the expensive end, with one item (construction management on top of a GC) that needs an explanation.

@juniper, whether the fee schedule is fine matters less to me than whether the sponsor will answer plain questions about it without getting prickly. That's been a better signal for me than any percentage.

I ran @canton's numbers through a return model out of curiosity. Take the fees to zero and the LP IRR moves about 160 to 190 basis points over a five-year hold depending on when the disposition fee lands. So the fee load is real, roughly a fifth of the total return in a deal targeting mid-teens.

That isn't automatically bad. The fees are what let a sponsor employ people who make the NOI grow. But it does mean the sponsor has to outperform a no-fee alternative by nearly 200 bps just to tie, and I'd want their prior deals to show that they have.

@juniper the standard-ish way to express it is total fees as a percent of equity, and separately as an annual drag on IRR. Two numbers. Then compare across deals.

I'll take the other side here since everybody's circling the fees like they're free money.

Running 240 units means a regional manager, a construction lead, an accountant doing monthly reporting, investor relations, and lender reporting that never stops. $72k a year of asset management fee doesn't cover a fraction of that. Sponsors who cut fees to win the raise end up understaffed in month 18 and then the property performance tells you all about it.

The acquisition fee is the one I'd defend hardest. By closing day that sponsor has spent real money on deals they didn't win, on third party reports, on legal for a deal that maybe died in diligence. The $680k isn't profit, a chunk of it is reimbursement for a pipeline you never saw.

Where I agree with @plumb: construction management stacked on a GC with no in-house team is a markup with a story attached. Ask who's on payroll. If the answer is nobody, the fee is arbitrage.

@quarry that's the most useful thing in the thread for me, because it reframes the fees as a staffing budget I can check. If the sponsor tells me the asset management fee funds a regional manager and a construction lead, I can ask how many units those two people cover across the whole portfolio. If it's 1,400 units per asset manager the fee is going somewhere else.

@juniper, before you compare this to another deal, ask for the sponsor's last two full-cycle deals with the original projections next to the actual results. Fee schedules are guesses about behavior. Realized deals are evidence. I've been slow on decisions to my own cost, but the one thing that slowness bought me was a habit of asking for the losers as well as the winners.