Acquisition fee 2%, asset management fee 1.5%, disposition fee 1%, then a 70/30. Am I paying all of those?

Question

Reading the deck for a 180-unit deal and the fee page lists a 2% acquisition fee, a 1.5% annual asset management fee, a 1% disposition fee, and then the cash splits 70/30 after an 8% pref. Guy at my supply house who does these told me the promote is just the 30 and the fees are on a separate track. Someone else told me the fees all get paid before the pref, so the pref is mostly marketing. I've spent my whole career pricing labor and materials and I can't work out from this page how much of my hundred grand ends up with the sponsor before I ever see a dollar.

Rena Guide · Accepted Answer

Three of those items are fees and one is a split. The 2% acquisition fee is normally charged against the purchase price and paid at closing out of the money raised, so on a $30 million property that's $600,000 leaving the pot before the property is even operating. The 1.5% asset management fee is annual and is usually charged on invested equity or on gross revenue, and it's paid out of operating cash flow like any other expense. The 1% disposition fee comes off the sale price at exit. The 70/30 is the waterfall: once LPs have received their 8% preferred return, remaining cash goes 70 to the LPs and 30 to the sponsor, and that 30 is the promote, also called carried interest.

So your supply-house guy is right that the promote and the fees are separate items. The second person is roughly describing the ordering, and there's nothing sneaky about it. Operating expenses, debt service, and the asset management fee get paid before there's any cash left to pay a preferred return with. A pref is a place in line, not a guarantee that cash shows up.

The basis matters more than the percentage. Two percent of a $30 million purchase price and two percent of $11 million of raised equity are wildly different dollars once the deal is levered. Ask which base each fee is charged on and get it from the limited partnership agreement rather than the deck. The deck is a marketing document, the LPA is what binds you, and the two don't always say the same thing.

chriswalton8 · Answer

Run it on the equity, since that's your denominator. A $30M purchase with roughly $11M of equity means that $600k acquisition fee is about 5.5% of the money in, so your $100k is working against a basis of more like $94.5k on day one. Asset management on invested equity is the more investor-friendly version. On gross revenue it grows as rents grow, whether or not distributions are running.

dmitri_v6 · Answer

The deck fee page is never the whole list. Look in the LPA for a refinance fee, a loan guarantee fee paid to whoever signs the recourse carve-outs, and a construction management fee. Then find out whether those fees keep accruing when distributions are suspended, because in plenty of agreements they do.

angela_burke · Answer

Those fees are payroll for the sponsor's team between closings. Fine, until fee income beats anything the promote could realistically pay them.

gregpowell66 · Answer

Construction management fee is the line I'd read twice on a heavy value-add. Five percent of $6M in hard costs is $300k, it's often payable to an entity the sponsor owns, and it sits on top of whatever the general contractor is charging. Worth asking whether the GC is an affiliate too (I've seen that structure on the build side and it isn't automatically bad, it just needs saying out loud).

Acquisition fee 2%, asset management fee 1.5%, disposition fee 1%, then a 70/30. Am I paying all of those?

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