Real estate capital raising and syndication
How much should a real estate sponsor charge in fees?
Short answer
A common structure I see is a 6 to 8 percent preferred return, then 20 to 25 percent to the sponsor, with higher splits above a second hurdle. If your team is small and your track record is short, I would charge less than that. Fees are a tool for winning your first investors, so keep them flexible.
Sponsors ask me this at nearly every event we run. My answer starts with where you are as a firm, not with a number copied from someone else's deck.
What the common fee structure looks like
A lot of sponsors I talk to are doing a 6 to 8 percent preferred return. After that, they take something like 20 to 25 percent. Some add a second hurdle at 10 or 12 percent, and then they take 33 or 40 percent. Sometimes it goes up to 50 percent. That is a common structure, though terms vary widely.
There is a lot to say about that structure. The legal side is one part, and many sponsors talk to a securities attorney about how to structure it before they put numbers in a document.
In this webinar I walk through the typical preferred return and fee tiers, and why they may not fit a newer sponsor.
Summary and key takeaways from this video
Why a small team should price below the standard
Look at your own firm honestly. Say you have a two to three person team. You have less than a seven year track record. You have done fewer than a dozen deals. In that case, you may be earlier in your development than the typical sponsor investors compare you to.
So I would not charge industry standard fees. I would charge something that gives you an advantage. Investors are taking a bigger leap on you, and your terms can reflect that.
"Far too many people fail to raise capital because they're stingy on their fees, their terms. They're not flexible."
I see this often. Great sponsors with a great idea never get to exist as an investment firm because they held too tightly to terms. If you have no money to invest, you have no firm.
Using fee breaks to land an anchor investor
One tool I like is the anchor investor. You can give them a break on fees for every million they put up, until you reach a certain level. It adds credibility to your raise. I think it is worth considering.
That anchor makes it easier for the next investor to say yes. A lower fee on the first dollars is often cheaper than never closing at all.
Focus matters as much as the fee
I wrote in our email newsletter that the smaller you are, the more focused you need to be. It is more credible to say you buy hospitality assets in one four square mile area of a city and that is all you do. A narrow focus helps justify your edge, which makes it easier to defend a fee.
Larger families may also want more control or transparency, especially if they can work with an independent sponsor rather than a blind pool fund. Family offices that made their money in real estate may think they can just do it themselves. Your offering has to be more compelling for them.
Many sponsors have a securities attorney look at their fee structure before sharing it with investors.
What I have said on this at our events
One thing I point out to sponsors is how the typical deal looks from the investor's chair. Most investors have seen deals that charge acquisition fees, disposition fees, financing fees, a capital raiser fee and an annual asset management fee, and then take 20 to 50 percent of profits after a six or seven percent hurdle. When a sponsor can say we don't make a dollar until you have doubled your money, that stands out. You do not have to copy that exact structure, but think about how many fee layers an investor has to accept.
"Importantly, we don't make a dollar until you have doubled your money. Every other real estate deal that we have seen charges you acquisition fees, disposition fees, financing fees, a capital raiser fee, an annual asset management fee."
"Every other real estate deal that we have seen charges you acquisition fees, disposition fees, financing fees, a capital raiser fee, an annual asset management fee, and then after, say, a six or seven percent hurdle return per year, they're taking 20 to 50 percent of all the profits."
Facts from this talk
- A commonly seen structure is a 6 to 8 percent preferred return, then 20 to 25 percent to the sponsor.
- Some structures add a second hurdle of 10 or 12 percent and then take 33 or 40 percent, sometimes up to 50 percent.
- A team of two to three people with under seven years of track record and fewer than a dozen deals is below industry standard development.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: Capital Raising FAQ Webinar. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around fee structure terms, offering documents and sponsor compensation disclosure. Do not use AI to write your own legal agreements.
What to do next
- Write down your team size, years of track record and number of deals completed.
- Compare your plan to the common structure of a 6 to 8 percent preferred return and tiered splits.
- Decide where you will charge below standard to win your first investors.
- Consider a fee break for an anchor investor on each million they commit.
- Consider talking with a securities attorney about the final structure.
More questions on this
What preferred return do sponsors usually offer?
In the conversations I have, a lot of sponsors offer a 6 to 8 percent preferred return. After that, they take a share such as 20 to 25 percent.
Should a first-time sponsor charge standard fees?
I would not. If you have a two to three person team, under seven years of track record and fewer than a dozen deals, I would charge less than industry standard.
How can I use fees to attract an anchor investor?
You can give an anchor investor a break on fees for every million they put up, up to a certain level. It adds credibility and helps you get to your first close.
Related questions
- What is the typical GP LP split in multifamily syndication?There is no single standard, but a common pattern is a preferred return to the investor first, often around 8%, then a split of the back end profit.
- What happens to investors when a syndication deal goes bad?When a syndication goes bad, distributions usually stop first.
- How do I raise capital for a mobile home park?Raise capital for a mobile home park by teaching investors why the asset class works before you ask anyone for money.
- How do I build an investor list for real estate deals?Start with people who already invest in deals like yours, then record what each one wants.
Work through it with the data room checklist. See all real estate capital raising and syndication resources.