When passive investors are seeking to invest in syndications, it helps to know how the deal is structured. After doing any sort of research or reviewing any investment opportunity offered by a syndicator, you will see a line item called “asset management fee.”
What Is Asset Management?
Asset management describes sponsor’s efforts in supporting the business plan. As you may know, when syndicators find find real estate deals, secure funding work with passive investors and attorneys to get it done, they are incurring their own costs from time and effort. Further, throughout the performance of the asset, syndicators work with their property management company to ensure that rents are being collected, improvements are being made, expenses are being cut, vacancies are being filled and anything else in support of that business plan. Each of these activities are critical in value-creation for everyone involved.
Asset Management Fees
In a syndication, the sponsor charges a nominal fee to support these tasks. Usually that fee is any where from 1-3 percent of the asset’s cash flow, but it can be even higher depending on variables such as the structure of the deal or the level of involvement needed to support the business plan.
It is important to note that asset management fees are not game changers for sponsors. It does not make syndicators rich. These fees simply help support or compensate the general partners in the deal for their time and effort expended in making the project work. Syndication is not an easy feat and asset management fees are one common characteristic of the deal structures.
Working With The Right Sponsor
As passive investors, understand how asset fees are structured. When working with the right sponsor, they should be reasonable and understood. However, not all sponsors are created equally. It is important to work with ethical people, especially when investing your hard-earned investment capital!
There are reasons why the Securities and Exchange Commission (SEC) has very specific requirements on soliciting offers to potential investors in real estate, and they exist to protect you, the passive investor. I share this because it is important (and the law for most deals) to have a preexisting relationship with potential syndicators before doing a deal with them.
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Rodney Robinson II