A case study in a syndication where the fee stack quietly ate the return the promote was supposed to reward

The 5 percent construction management fee on a heavy capex plan is the one that should have prompted a walk. It creates a reason to spend, and on rural multifamily where the units are cheap and the capex is proportionally large relative to value, that reason gets expensive fast. Did they ever justify the capex against rent achievement? Because 19 percent NOI growth over four years on 138 units with heavy spend is not obviously good. That could be inflation and market rent plus a lot of money you paid them 5 percent to spend.

Asset management fee on gross revenue is the clause to flag first, and it shows up in more documents than people think. On a stabilized deal with a 55 percent expense ratio, 2 percent of gross revenue runs to something close to 4.5 percent of NOI every year, and it grows as rents get pushed. So the sponsor gets paid more for revenue growth whether or not it drops to the bottom line. A fee on invested equity is preferable because it stops growing, or a fee on collected revenue with a cap. The other question worth asking is whether the administrative charge was actually pass-through cost or a margin. $9,000 a year across a five property fund for accounting and reporting isn't obviously unreasonable. If it was billed as an allocation of actual third party cost, fine. If it was a flat charge to an affiliate, that's a sixth fee wearing a different hat. Worth checking whether the docs name who received it. One thing worth defending in this case: the disclosure was there and got read, and the failure was arithmetic rather than diligence. Reading fees as a list is nearly useless. The number that matters is total sponsor compensation as a fraction of total projected profit, and almost nobody publishes that because it's ugly at base case in most deals.

Sitting on the service side of this and it's striking how much of what you paid for was work that gets done by third parties anyway. Construction management on rural multifamily is usually a regional GC and a superintendent, both billing separately, with the sponsor's 5 percent stacked on top for oversight. I'd have wanted to know who was actually walking those five properties and how often, because if the answer is a quarterly drive-by then 5 percent of capex is a lot for a drive-by.