So you’ve thought about dipping your toe into commercial real estate investing. You’ve looked over various investment summaries and several proformas. Then you notice fees – fees galore. A Manager’s fee, acquisition fee, sales commission fee, capital fee, organizational fee. The list seems to be never-ending – everyone has their hands in the cookie jar. One of the issues with real estate, is the fact that it is a convoluted industry with multiple parties involved.
It is prudent to make sure each deal has the appropriate experts engaged, but it also important to get value for the fees being paid. In a relatively smooth transaction, you can account for roughly 2%-5% of the total cost to be attributed to fees (which is a very wide range, because every single real estate transaction is different). Instead of looking at fees as a sum number, it’s important to dissect them on a case-by-case basis. Today we’ll talk about what fees are involved, and discuss what to expect in terms of cost.
Most real estate deals have the following fees that need to be paid either to 3rd parties or parties associated to the Sponsor. If you come across fees other than the ones listed below, be careful and ask for a detailed explanation.
- Sales and Leasing Commissions
- Development/Entitlement Fees
- Legal Fees
- Debt and Equity Origination Fees
- Asset Management Fees
- Acquisition Fees
Asset Management Fee – these fees are seen on individual deals, as well as funds. While the total fee can vary, most expect to pay between 1-2% annually on all invested equity or the value of the property. This money goes to the firm which handles all investment management services. This fee is designed to make sure someone is paying attention to all the details, hires the operators, analyzes the market, evaluates offers, oversees the budget, the loan, property management etc.
Disposition Fee – The only issue here is selling the actual asset itself. Smaller firms may sell the assets themselves to save investors money, whereas larger firms will typically hire well-known brokers to get the best possible exposure and price. Worst case scenario is paying about 3% of the sales price, which, if your investment has done well, won’t impact you too negatively. Good brokers can make a world of difference.
Sales and Leasing Commissions – Whether the brokers are 3rd party or affiliated to the sponsor it is important to have someone actively marketing the asset for lease or sale. In addition, the sponsor may have been introduced or otherwise engaged a broker to get the opportunity initially. Leasing and sales commissions are typically between 2-6% and are shared by the buying and selling brokers.
Legal Fees – these fees are fairly broad and pertain from anything like closing the escrow, helping with loan documents, or setting up an LLC for the property/investment.
Acquisition Fee – Whether in-house or a third party, those who find a specific project or development typically charge an acquisition fee (otherwise known as a “finder’s fee”). These fees are standard industry practice and can either be flat fees ($50,000), or a percent of acquisition cost (1%-3%+).
Entitlement/Development – these fees are typically incurred in new construction and value-add projects, but don’t confuse this fee with the construction cost. These are fees which the sponsor may charge to work with the construction company. Things like negotiating bids, dealing with contractors, creating reports, running due diligence, etc. It’s a laborious process, because it takes a very keen eye for detail. These fees are anywhere from 3% to 5% of construction cost.
These are all fairly standard fees that assume an investment goes smoothly. If an investment goes south, you can almost guarantee additional fees may loom – attorney’s fees, late payment fees – the list can go on forever. It’s important to note that while annoying and pesky – fees are normal. Think about buying a car and how grueling that process is. Now imagine buying a car that costs $50,000,000 that you need to build from scratch, where all parts come from different vendors, and you need to sell it after two years. It doesn’t seem so bad anymore.
If you have any questions regarding fees or real estate in general, feel free to reach out to Northstar’s Director of Equity, Danny Mulcahy at danny@northstarcp.com. To view Northstar’s current open investment offerings, please visit https://invest.northstarcommercialpartners.com/.