A typical practice in structuring commercial real estate transactions is a joint venture between two parties:
- Party A, commonly known as the Sponsor, Operator or General Partner/GP, makes day-to-day property level decisions, oversees the property manager, supervises improvement projects and generally executes the on-the-ground aspects of a business plan.
- Party B, commonly known as the Limited Partner/LP, provides most of the equity capital necessary to fund the acquisition and any planned value-add strategy.
The idea here is simple. The LP relies on the GP’s expertise in executing the business plan. Now, if you were the GP putting in sweat equity so the LP can enjoy passive returns, you likely won’t work for free!
Let’s introduce a variety of methods commonly used to compensate the compensate the GP for its sweat equity and operational oversight.
Origination/Acquisition Fee – As simple as it sounds, this is generally calculated as a percentage of the purchase price and for the most part ranges from 0-2%.
Financing Fee – Not as common as acquisition fees, but still found in the wild. For the most part, ranges from 0-1% and is calculated as a percentage of the initial loan balance.
Disposition Fee – GP: “Hey, we sold the asset.” LP: “Awesome, how much did we make?” GP: “I haven’t calculated that yet, but we sold it, so that will be 1% of the sale price please.”
Asset Management Fee – This one can vary, but is usually either a fixed monthly dollar amount, a percentage of revenues, or a percentage of the equity capital invested. The idea here is to compensate the GP for dedicating its employees and time to managing the asset. Note: This is NOT a property management fee, which we’ll assume is a 3rd party provider, but rather means overseeing strategy, leasing, reporting, etc.
Construction Management Fee – If there is renovation work to be done, or tenant improvements, or other capital expenditures, and your property manager is not tasked with overseeing the work (or sometimes, even if they are), you’ll find sponsors asking for this fee. What’s reasonable? It depends, but imagine a sliding scale from 1-5% depending on the size of the work necessary (smaller jobs -> higher percentages).
Leasing Fee – You’ll also find sponsors asking for this even if there are 3rd party leasing agents on the assignment. Why? The why behind any of these fees is, because they can, and because LPs don’t ask. Especially smaller groups of LPs with less negotiating leverage.
Profit Sharing/Waterfall/Incentive Fee
Assume for a moment that of the equity required for a given investment, 90% of it comes from the LP, and 10% comes from the GP. How should distributions be split? 90/10?
Well, actually, a very common profit-sharing agreement in real estate joint ventures comes in the form of an uneven sharing of cash flows. For example, equity might be invested 90/10, but distributions could be split 70/30.
“That’s not fair” an investor might say, and that investor is probably right. Which is why we find a practice called the “waterfall.” The waterfall, or incentive fee, is a profit-sharing mechanism in which profits are shared unevenly, but only above a specified minimum return on the investment. Which is to say, an investor is happy to share more profits with the Sponsor, but only if they have received a 10% return on their capital, for example.
What is a standard waterfall? Wish we could tell you. It’s one of the most negotiated items in a joint venture, that range from obscene (huge profit share to operating partner, low return hurdle) to quite reasonable (investor receives solid return and thereafter shares a portion of the returns). In any case, a waterfall is money out of the limited partners pockets had they executed the transaction directly without an operating partner.
Sowing Confusion – Shedding Light to Hidden Fees
The summary is that limited partners pay for the benefit of not doing the work themselves. What they pay and how much they pay, as you can see, varies greatly. And hopefully, YOU, the investor, are informed enough to be able to ask the proper questions. But there are ways to hide fees! And unless one knows where to look, the limited partner investors are charged these fees without even knowing about it.
It all comes back to the joint venture format. Are you investing with the real estate operator directly, or are you investing with a firm/website that aggregates investor capital, and subsequently invests with a real estate operator? I hate to tell you this, but it’s likely the former (unlike Streitwise, where you’re investing directly with the operator).
Why is this distinction important? Because it means that the company you’re investing with (let’s call them the Aggregator) can tell you “Hey, we don’t charge acquisition fees” or “No profit sharing waterfall here” all the while misleading you that the real estate operator that ultimately manages the asset does charge those fees.
A property is acquired for $30,000,000 through a combination of $20,000,000 of debt and $10,000,000 equity.
You invest with Aggregator (who charges an asset management fee of 1% per year on equity) and raises a total of $9,000,000. Aggregator takes that capital and invests in a joint venture with Sponsor, who contributes $1,000,000 of equity.
Suppose Sponsor charges a 2% acquisition fee ($600,000), a 1% financing fee ($200,000) and a 1% asset management fee ($100,000 per year). Suppose further that the cash flows are split 80% to Aggregator and 20% to Sponsor after an 8% return. That’s $800,000 right off the top, $100,000 per year, and cash flow profits that will NOT flow to the investors who invested with the Aggregator. And yet, the Aggregator can still claim that they do not charge such fees.
The joint venture hides fees! No matter how you slice it, fees paid to an operator, even if you are not investing directly with them, is money out of an investor’s pocket. If it weren’t for that fee, the money would be available for you.
No Hidden Fees
That’s what we mean when we say “No. Hidden. Fees.”
Investing with Streitwise means you own your percentage interest of the REIT’s portfolio – without further layers of fees and profit sharing squandered to third-party sponsors. We are the sponsor and we only charge 3% up-front and 2% ongoing. Simple, easy, fair.
We don’t tell investors “NO acquisition fees, financing fees or disposition fees”, only to turn around and invest in a joint venture where a sponsor charges those same costs at the expense of your return. We’re not paying a double asset management fee to a third-party operator. No means no, as far as we’re concerned.
Yes, it can be complicated, and yes, if you know where to look and what questions to ask, you can determine whether an investment is funneling your profits into the pockets of others. But investing with those you trust makes the job easier – life’s too short!
So what fees DOES Streitwise charge?
Fees are 3% up-front and a 2% annual management fee. This up-front amount won’t reduce the number of shares you own, it’s that a portion of your investment is used to reimburse organizational and offering expenses. Note: All dividends distributed are net of all fees.
The Real Estate Crowdfund Review, a non-affiliated rater of real estate platforms rated us as the Best Fees out of all Core-Plus REITs open to non-accredited investors.
Eliot Bencuya is the co-founder and CEO of Streitwise. Eliot has extensive experience identifying, underwriting, and executing value-add real estate investments.
Prior to forming Streitwise, he was a Vice President of Acquisitions for Canyon Capital Realty Advisors and the Canyon-Johnson Urban Funds, where he was responsible for originating, underwriting, structuring and executing transactions in the Pacific Northwest, Northern California and Midwest regions. Mr. Bencuya also held positions at Sovereign Investment Company (a subsidiary of the Marcus and Millichap Company) and the investment banking division of Merrill Lynch & Co. He holds a Bachelor of Arts degree in Economics and International Studies from Yale University, and a Masters of Business Administration degree from the Haas School of Business at the University of California, Berkeley. Mr. Bencuya is a member of ULI.