What is an Acquisition Fee in Real Estate?
There are two participant groups in a typical private real estate transaction structure: the general partner(s) as well as the limited partner(s). While the limited partner(s) contribute investment funds but generally play a supporting role, the general partner (GP) is responsible for locating, financing, and administering the property. It is typical for the GP to collect one or more costs because they perform a lot of preliminary work for the benefit of the LPs.
Let's take a look at what acquisition fees are in a commercial real estate deal, and how it is calculated and charged.
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What is an acquisition fee?
The overall cost a business or person pays when acquiring a property are referred to as the acquisition costs. This total can be deducted while filing corporate taxes since it has been recorded in full on the books as well as on tax records. The costs used to compute acquisition costs are different from those used to establish the gross sales price since they are borne by the buyer instead of the seller.
This price covers the cost of the property, the cost of appraisal fees, the cost of the attorney's fee, the commission, the cost of credit report, the cost of the hazard insurance, and the cost of the paperwork preparation charge. The loan appreciation charge, application cost for mortgage insurance, mortgage insurance premium, loan taxes, termite inspections, property survey, tax stamps, and title insurance are also included.
What is the typical acquisition cost of a property?
The acquisition cost of a property depends on a few variables.The limited partners, deal amount, asset class, and kind of property can all affect the fee structure. However, as there is fierce competition in the private equity corporate investments in the real estate sector, they often fall within a very small range.
The typical acquisition fee for commercial property is between 1% and 2%. The higher end of this spectrum often contains smaller real estate transactions, while the lower end typically contains bigger transactions. Understanding the actual formula used to compute the purchase fee is crucial for individual investors when determining its value.
Can you negotiate acquisition fees? Well, since the acquisition fee is not set in stone investors may talk to the real estate agent to negotiate the rate.
Calculating Acquisition Fees
As previously said, acquisition fees are represented as a percentage, however, the secret to figuring them out is to determine what proportion they are. Two choices are available.
The first choice is as a percentage of the total contract size. This approach multiplies the purchase price by the acquisition charge percentage. For instance, a 1% acquisition fee on a $10 million sale would be $100,000.
The second choice is to deduct invested equity from the purchase charge. For instance, a unit with a $10 million purchase price may be funded with a $7 million loan and $3 million in limited partner stock. The 1% charge in this arrangement is deducted from the $3 million, making it $30,000 instead.
Investors should carefully study the purchase fee calculation process.
Example of a Typical Acquisition Fee in Real Estate
Generally speaking, there are two methods for syndicators to get their purchase fees. First and most frequently, syndicators deduct the charge from investor contributions and factor it into cash gap estimates. As an alternative, some syndicators agree to a deferred payment in which the acquisition charge is paid from investor payouts up until the balance of the delayed acquisition fee is zero.
We'll describe the first structure as an illustration, which involves receiving the acquisition money at closing. We'll use the same figures as before and add a 1% purchase fee.
In the event of purchasing a property where the acquisition cost totals $5,000,000. This would include 25% of the down payment ($1,250,000) and a loan amount of $3,750,000. With the closing costs (5% of the loan) totaling up to $187,500, the acquisition fee - which is only 1% of the acquisition cost - would be $50,000.
The required cash amount would be $1,487,500, sponsored cash contributed would be $250,000 and the cash gap would add up to $1,237,500.
We have factored in a 1% purchase charge ($50,000) while calculating the aforementioned values. The amount of money needed has increased by $50,000. Additionally, assuming that the sponsor's financial contribution stays at $250,000, this purchase cost is transferred to the cash gap. As an outcome, investors are required to put up $1,237,500 (as opposed to $1,187,500 without any of the purchase charge) to complete the transaction.
Additional Fees To Consider
In private real estate syndications, there are additional real estate transaction costs incurred. Other costs that potential investors can incur include:
Fees for Developmental Construction: For projects that are constructed from the bottom up, the general partner might charge a fee to oversee the construction and development.
Disposition Fee: There is a significant expense involved in getting a property ready for sale, advertising it, and closing the deal. The limited partners may impose a disposal fee to recover these expenses.
Fees for Property Management: These fees are assessed for overseeing the property's daily operations. The general partner may manage this internally or through a third-party provider.
Asset Management Fee: A fee levied for the expense of managing a commercial real estate property. These tasks include making a budget, monitoring the state of the market, and maintaining vendor relationships.
Fees for Refinance / Debt Placement: Finally, certain general partners might charge a fee for their involvement in financing or refinancing a property's debt. This may be in addition to the market rate origination cost levied by lenders.
Real estate investors should be careful to factor in any pertinent sponsor fees when estimating their possible return on a project to get a more realistic picture of the potential profit. Once more, the offering documentation for investment will contain the fee schedule.
Private Equity Real Estate & Acquisition Fees
In just about any private real estate syndication, acquisition fees are typical. Two important criteria should be taken into account by investors when weighing the expense vs benefit of paying them:
The fee shouldn't be a source of profit for the general partner and should be in line with industry standards.
Background of the sponsor
The sponsor/general partner must have a track record of producing greater profits, net of the acquisition price levied, in order to justify the fee.
Once more, investors should carefully read the offer documentation of a deal to determine what the fees are and exactly how they are assessed. To make sure they are typical and conventional, they should also compare them with industry norms.
In order to cover the initial costs of locating, approving, and closing on a commercial investment property, real estate companies charge acquisition fees.
The deal's overall size and entire cost may be used to calculate the acquisition fee. Or, they might be assessed based on how much stock was raised from investors.
A typical purchase cost lies between 1% and 2%. But the real estate company shouldn't use it as a source of profit. It ought to be just adequate to pay for their initial expenses.
People should carefully analyze the paperwork when assessing interest in such a private commercial real estate deal to make sure the purchase fee and any other fees are consistent with industry norms.
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