Crowdfunding Lawyers

Fee Structures and Your Deal: Understanding Commonly Used Terms

July 6, 2023
Fee Structures and Your Deal: Understanding Commonly Used Terms

It would be nice if you could put together and launch a successful deal without incurring any cost to yourself. Sadly, the self-funding portion usually comes after the launch. You need funds to get things up and running.

To account for that, you’ll need to structure your business correctly, lay out salaries properly, and account for additional fees that you’ll encounter. What fees? This post will walk you through some of the most common ones.

1. Acquisition Fees

The acquisition fee is the cost of your services to the syndication to do due diligence and manage the acquisition process. This is not to be confused with broker fees. Generally, the acquisition and broker fees are two separate things. You’re there to protect the company and the investors, and that takes time, expertise, and knowledge.

Whenever you have time or risk into any of your responsibilities relating to real estate or other investment projects, you should be receiving a fee. Anywhere between 1% to 2% of the purchase price is a very reasonable and expected acquisition fee today.

2. Disposition Fees

On the back end, it’s time to sell the real estate or the asset. There’s generally another 1% to 2% for your services in packaging and preparing the company or the asset for sale, working with the brokers, helping throughout the sales process, and more. Anything that requires your time and effort should come with a disposition fee.

3. Asset Management Fees Tied to Rent

From the management side, you have asset management services for the company. The asset management fee compensates you for services to the company. It generally includes the following:

  • Managing the property management company/team
  • Reporting to the investors
  • Being responsive to the investors
  • Managing the general business of the syndication itself

Of course, this shouldn’t be confused with third-party property management fees. Those can rise as high as 10% of rents. Of course, you can offer those same services and charge between 3% and 10% of the rent for so-called “boots on the ground” services. To help you distinguish between the two, just remember:

  • Asset management fees account for your services to the company.
  • Property management fees account for services to the property.

However, if we’re talking about business acquisition and you’re working within the business, there probably won’t be an asset management fee. With that said, there are some exceptions. Maybe you’re managing a hedge fund or a private equity fund. In that case, there are generally assets under management fees that may be 1% to 2% of the fund’s total assets on an annual basis.

So, asset management fees, assets under management fees, and property management fees are all annual or ongoing fees. The acquisition fee or the disposition or sale fee are more transactional fees you get at once, but you need to keep getting them continuously.

4. Finance or Refinance Fees

You can look at finance or refinance fees as just part of the transaction. Essentially, you receive a fee or a percentage of any loan based on your services in obtaining that loan. Often, you’re the guarantor of the loan, which means that even if it’s a non-recourse guarantee, you still face the risk of serving as the guarantor.

The finance and the refinance fees are compensation for the time and work to get the financing together, as well as a guarantee fee, to make sure that you’re compensated for the risk.

However, this is where things start to become optional. Some people will be fine with the profits and the acquisition fee and decide not to take a finance or refinance fee. Including this fee is reasonable but optional.

5. Construction Management Fees

Construction management fees can be broken into several categories.

Property Developers: Property developers may take the project from the ground up. They’ll receive a development fee based on the total package and expected costs. Generally, developer fees vary between 2% to 5%. Sometimes they’re higher if they incorporate other fees and other services.

General Contractors: There’s generally a GC that steps in, and they receive additional construction management fees. In some cases, those fees can amount to 10%.

Determining what fee is applied where and paid to whom is all about determining whether someone is working as a property developer, general contractor, or within another role. It’s also about ensuring that the fee structure is equitable and fairly compensates the individual for their time, expertise, and effort.

6. Interest on Deferred Fees or Manager Advances

Interest on deferred fees or manager advances is rare, but it does occur. This is particularly true when discussing convertible notes or using your own money to fund the deal. You’re technically making a loan to the company unless you’re buying in like any of the other investors.

If you’re making a loan, it only makes sense that you earn interest on that money. However, if you’re also earning a management fee, you may waive that fee entirely or postpone it to make the situation easier on your investors.

In Conclusion

Each deal is unique and may involve any number of different fees. We’ve discussed some of the most common here, but it’s important to work with an expert who understands the nuances of your specific situation. That helps ensure that the deal is correctly structured, the appropriate fees are laid out, and everyone is compensated fairly for their contributions.

Ready to move forward with your deal? Get in touch with Crowdfunding Lawyers today to schedule a free consultation and learn more about our services.

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