How to Structure Fees Like a $5B Operator

The Performance Based Blueprint

Are Fees Helping or Hurting Your Deals?

Fees in commercial real estate syndications are often a polarizing topic. For some, they're a necessary part of the business—compensating operators for their time, expertise, and effort. For others, they raise red flags, signaling potential misalignment between operators and investors.

But the conversation around fees isn't as simple as "good or bad." It's about balance: ensuring operators can sustain their businesses while prioritizing investor returns.

In this comprehensive resource, we'll explore:

• A detailed breakdown of standard syndication fees and their market ranges

• Real insights from top operators on eliminating asset management fees

• Analysis of how different fee structures impact returns (with real deal examples)

• Mathematical proof of why fee minimization benefits both operators and investors

• A step-by-step template for creating your own fee communication document with implementation guidelines

Let's start by breaking down how syndication fees work and explore the nuances of performance-based compensation.

Breaking Down Syndication Fees

In a typical syndication, the General Partner (GP) or sponsor charges fees to compensate for sourcing, managing, and eventually selling the deal. Here's a breakdown of the most common fees:

Acquisition Fee:

• Charged at closing (1%-3% of the purchase price) for sourcing and underwriting the deal

• Example: On a $20M property, a 2% acquisition fee = $400,000

Asset Management Fee:

• An ongoing fee (1%-2% of invested equity) for overseeing property performance and investor relations

• Example: On a $10M equity investment, a 2% asset management fee = $200,000/year

Disposition Fee:

• Charged at sale (1%-2% of the sale price) for managing the disposition process

• Example: On a $24M sale, a 1% disposition fee = $240,000

Refinancing Fee:

• Charged if the property is refinanced (1%-2% of the refinanced amount)

While these fees are standard, how they're structured and justified can vary widely—often reflecting the operator's experience, strategy, and philosophy.

Beyond the Checklist: A Deeper Look at Fees

While some investment criteria rigidly screen deals based on fee percentages alone, experienced investors know this oversimplified approach misses crucial nuances. Rather than treating fees as a simple checklist item, sophisticated investors examine how fees contribute to deal success and operator alignment.

The Fee Spectrum: Beginners vs. Industry Veterans

Fee-Heavy Operators: Why It's Not Always a Bad Thing

For early-stage operators, upfront fees can be critical to keeping the lights on. Acquisition fees often fund underwriting expenses, legal costs, and overhead, while asset management fees help sustain day-to-day operations.

However, heavy reliance on fees can lead to misalignment with investors, especially if they're not tied to property performance. For example, an operator collecting large asset management fees regardless of returns may seem more focused on short-term gains than long-term success.

That said, fee-heavy structures aren't inherently negative:

Covering Costs Transparently:

• Early operators need these fees to fund operations like payroll, third-party property management, and investor reporting systems

Scalability Reduces Reliance on Fees:

• As operators grow and generate consistent cash flow from their portfolios, they can reduce or waive fees entirely—prioritizing performance-based incentives

Fees Aren't "Anti-Investor" If Transparent:

• When disclosed upfront, fees can serve their purpose without undermining trust

Performance-Driven Operators: Risks and Rewards

On the other end of the spectrum, top-tier operators often minimize upfront fees and focus on performance-based compensation. These operators build trust by prioritizing investor returns, sometimes charging:

• No asset management fees

• A promote (profit share) only if investors achieve a preferred return (e.g., 8% annualized)

• Tiered promotes, where operators earn higher splits for exceeding return benchmarks (e.g., 15% IRR)

While this approach demonstrates confidence, it also places financial strain on the GP, who may not see significant earnings until the end of the holding period.

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The Hidden Challenges of Performance-Based Fees

Performance-based fees are often seen as the gold standard for aligning incentives, but they come with downsides that aren't always discussed:

Delayed Compensation

Operators relying solely on performance-based fees often don't see significant payouts until the property is sold or refinanced—years after the deal closes. This delay can strain cash flow, especially for smaller or newer operators who still need to fund overhead and salaries.

Misleading Perceptions of Cash Flow

Many aspiring syndicators are drawn to the business by promises of "cash flow," but in reality, responsible syndicators reinvest property income into operations, reserves, and improvements. This leaves little to no cash flow for the GP during the holding period.

Dependence on Backend Success

A performance-heavy model places all the financial risk on the operator. If the deal underperforms due to market conditions or operational challenges, the GP may walk away with little to no compensation.

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A Tale of Two Structures: Understanding the Impact of Fee Choices

To illustrate how different fee approaches affect both operators and investors, let's compare two structures on a $20M acquisition with $6M in equity: