Understanding Fees in Passive Real Estate Investing

This article is a deep dive of a topic recently covered on the Breneman Blueprint, hosted by Breneman Capital founder Drew Breneman.

Any investment manager, in order to hire and retain the best talent, purchase the best software, and keep the lights on, needs to charge fees. Well-run firms find a balance between charging fees that will ensure that the company is able to continue to operate during market slowdowns, while simultaneously minimizing additional costs to acquire/maintain properties so that investor returns are maximized.

In general, there are three types of fees.

Transaction fees: charged whenever a property trades.
Management fees: charged year to year, as the property is being operated by the sponsor.
Incentive fees: often called the performance fee or promote, paid out to the sponsor and vary based on the performance of the investment. 

This article will focus primarily on transaction and management fees, with a following blog covering incentive fees coming very soon.

Transaction Fees

When it comes to transaction fees, sponsors typically charge an acquisition fee upon closing. This fee, which is typically 1-2% of the purchase price, varying on the size of the deal, is paid out for services related to finding, negotiating, and closing the acquisition.

The second most common fee is a disposition fee, which is a fee related to the sale of an asset. While it is the second most common fee, it is still rare as it can be considered “double-dipping” by the sponsor, who will be getting paid out their incentive fees at the same time. A typical amount for this fee is 0.5-1% of the sale price.

Some strategies call for a refinancing of the property, where you may sometimes find a refinance fee. This is paid out for services related to the refinancing of the loan on the property and is normally 0.25-1% of the refinanced loan amount.

You may also see a debt placement fee, which is less common. This fee is for sourcing the debt on the property, typically between 0.5-1% of the total loan amount. Sponsors may have an in-house capital markets team fully responsible for sourcing the debt, where you may see this fee for doing the work that is typically expected of a 3rd party mortgage broker. If the sponsor does not have capital markets team, then this fee is simply used to pay the 3rd party mortgage broker’s fees. Those individuals typically charge 1% or less for this.

Another fee you may see is an equity placement fee, which is paid to an internal or external team that raises the equity for the purchase. The market rate for this fee is typically 2-3% of the equity raised. It is quite rare to see an equity placement fee in a syndication of many individuals. This fee is more common in investments in which all the equity is provided by a single party that was introduced to the sponsor through a 3rd party. 

The loan guarantee fee is another uncommon fee that is paid to the guarantor of a loan that is used in conjunction with a real estate investment opportunity. This is typically 1-3% of the total loan amount, determined by the level of “risk” involved in a deal. For example, the acquisition of a stabilized asset with minimal execution risk will charge a lower loan guarantor fee than a full, gut renovation of a large property.

It is important to note that most if not all of these fees, except for the acquisition fee, are uncommon.

For transaction fees, Breneman Capital only charges an acquisition fee.

Go straight to the full discussion on Transaction Fees in the podcast by clicking here: Transaction Fees.

Management Fees

As opposed to transaction fees, which are one-time fees paid upon the acquisition, closing, or refinancing of an asset, management fees are recurring fees paid out to sponsors or a property management company. The most common ones you will see are asset management fees, organizational fees, and property management fees.

Asset management fees are charged by sponsors for their work managing and operating the investment. This fee covers business plan execution, oversight of property management, and other day-to-day operational costs of the property that are managed directly by the GP. They range from 0.5-2% of the total equity in the deal, depending on the size of the transaction, with smaller deals typically incurring larger percentages. You may also see it as a percentage of gross income, with the percentages adjusted to be around 0.5-1% of the effective gross income.

Organizational fees are fees passed through to investors on deals for administrative purposes. For example, you may see LLC fees for the renewal of organizational documents related to the property or direct legal fees incurred by the property itself pass through as an organizational fee for the investment. The property may also have technology, marketing, investor relations, or other similar expenses that some sponsors may pass through. Most of these fees are rare, but they are becoming more common as more technology and resources are needed to stay competitive. Breneman Capital charges none of these fees and only would pass through direct costs for LLC renewals and legal fees incurred by a property.

The most common of the 3 fees is the property management fee, which ranges from 2-5% of the effective gross income of the property. Pretty much every deal will charge a property management fee, with the percentage being determined by the difficulty of managing the property and the size of the asset itself, with more difficult & smaller deals charging a higher fee as a percentage.

For redevelopment deals, or deals with any renovations/capital improvements, it is common to see a construction management fee being charged by the sponsor. Redevelopment/value-add strategies require more time and are riskier to execute than simple stabilized/lease-up acquisitions, and therefore sponsors will charge a fee to take on difficult construction projects. These fees cover working directly with contractors & property management to execute a renovation plan in a timely way, as well as the work with lending entities to fund projects. Fee percentages are based on the total renovation’s hard costs, of which the market rate is anywhere between 3-10%--with more costly projects, such as new development deals, charging lower fees.

For commercial properties, it is common to see leasing fees paid out to leasing agents/brokers as a commission for leasing up office, retail, or industrial spaces. These professionals often have relationships in the field that allow owners to find the best possible tenants for their spaces and can secure a tenant more quickly than your average owner could. 

See the full discussion on Management Fees from the podcast by clicking here: Management Fees.

More Info

It is important to be well informed surrounding fees when you invest passively in real estate, so that you may best evaluate sponsors and the investment opportunities they present.

Watch or listen to the full Breneman Blueprint episode to learn more about investment fees through your preferred podcast destination below:

Listen to the episode on Apple Podcasts

Listen to the episode on Spotify

Dive Deeper

To learn more about investing passively in real estate, please download our guidebook by clicking here: Guidebook Download.

About Breneman Capital

Breneman Capital is a private real estate investment management firm specializing in the multifamily property sector.  Breneman Capital employs a deliberate investment approach, leveraging data analytics and proprietary technology to generate superior risk-adjusted returns for investors.

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