Unveiling the Inner Workings of Commercial Real Estate Investment: Fees and Alignment of Interests
Welcome back to the "How to Invest in Commercial Real Estate" podcast, where we bring you the latest insights into the world of commercial real estate investing. In episode 124, we'll delve into a crucial topic – understanding the fees involved in real estate syndication and how these fees align the interests of sponsors and investors. Join us as we explore the intricacies of commercial real estate investment and how it all works at The Criterion Fund.
Episode Highlights:
A Glimpse of Our Recent Ventures in Vegas:
In this episode, we kick things off with a quick update on our recent visit to Las Vegas. We toured several potential sites, and while we only committed to two of them, it was an exciting trip that provided a glimpse of our future pipeline.
Two Upcoming Deals:
The first of the two deals we're excited about is the Carson City hard corner gas station and convenience store, along with an auto body shop in North Las Vegas, named "Perfect Auto." These investments are set to close soon, and we're eager to share more details with our investors.
Understanding Sponsor Fees:
The episode then dives into a critical topic – sponsor fees in real estate syndication. We explore various fees that sponsors may charge, explaining the rationale behind each one. Our goal is to help you understand the fees associated with our investment opportunities.
Acquisition Fee: Typically 1-3% of the total asset value, collected at the time of closing. This fee covers upfront costs like site visits, due diligence, and preparation.
Equity Placement Fee: This fee is charged to the investment company raising funds and is generally a fixed amount, like $50,000. It covers the cost of securing the equity for the project.
Disposition Fee: Usually 1-2% of the sale price, but taken only when the investment performs exceptionally. The fee aligns with investor returns, and the closer we get to the target return, the more likely we'll take this fee.
Asset Management Fee: Typically 1% of revenue generated by the asset. This fee covers ongoing management, administration, and day-to-day operations of the property.
Debt Guarantee Fee: A 1% fee is charged for debt that sponsors personally guarantee. This fee compensates sponsors for the risk and liability they assume.
Promoted Interest (Waterfall): The primary profit-sharing mechanism that aligns sponsors' interests with investors. Sponsors earn a percentage of profits once investors receive their preferred returns.
Aligning Interests with Promoted Interest: The most significant profit source for sponsors is the promoted interest or waterfall structure. This structure ensures that sponsor interests align with investors' interests. We earn a share of profits only when we exceed a certain return hurdle, typically 8%. This mechanism motivates us to prioritize your investment's performance.
How Sponsor Fees Relate to Investor Interests: We emphasize that sponsors don't profit significantly from fees but rather from the success of the investment. If investors lose money, sponsors don't earn substantial fees, as fees are designed to cover costs and administrative efforts. Sponsors' interests are directly linked to investor success.
Comparing Fees to Industry Standards: To ensure transparency, we offer a quick overview of industry standards for various fees. Acquisition fees range from 1-3%, and larger deals tend to have lower percentages. Equity placement fees are often around $50,000. The asset management fee is generally 1% of revenue. Debt guarantee fees are usually 1%, and disposition fees fall in the 1-2% range. These figures provide a reference point for evaluating fees in the commercial real estate industry.
No Investor Capital Losses: We highlight our commitment to safeguarding investor capital. Throughout our history, we've never lost investor capital on any deal. We've weathered challenges, and although we've had to pause distributions on some properties due to unforeseen circumstances, we've consistently returned the original capital to our investors.
Conclusion:
In this episode, we've explored the critical topic of sponsor fees in commercial real estate syndication and how they align with investors' interests. Understanding these fees and their relation to industry standards is essential for informed decision-making when investing with The Criterion Fund. Remember, our success as sponsors is intrinsically tied to your success as investors, and we're dedicated to securing your investments and helping you achieve your financial goals.
For more insights on commercial real estate investing and our latest opportunities, stay tuned to the "How to Invest in Commercial Real Estate" podcast. Thank you for joining us, and we look forward to guiding you on your investment journey.
