Construction Management Fee in a Syndication: What It Pays For and How It Is Set
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A construction management fee pays for overseeing a deal's renovation or capital improvement program: scoping the work, bidding contractors, scheduling, inspecting quality and approving invoices. In a value-add apartment syndication it is usually a percentage of the renovation dollars actually spent, so it grows with the size of the program. It may be earned by the sponsor, by the property manager (often called a construction supervision fee) or by an outside construction manager. Because it is usually paid from the renovation budget raised at closing, it is part of what investors fund. Before investing, check three things: who earns it, whether it overlaps with another fee for the same work, and whether the offering documents state the rate and the basis.
This guide explains how the fee works and how to spot overlap. For every fee a sponsor may charge, see real estate syndication fees.
How the fee is set
| Approach | How it works | Watch for |
|---|---|---|
| Percentage of renovation costs | A set percentage of each dollar spent on the program | Grows with the budget; check the base excludes the fee itself |
| Flat fee | A fixed amount for the program | Scope creep if the program grows |
| Built into a contractor's markup | General contractor charges overhead and profit | May be on top of a separate supervision fee |
See the value-add renovation budget per unit and the value-add business plan.
Who earns it
- The sponsor, when the sponsor team runs the renovation itself.
- The property manager, as a construction supervision fee in the management agreement. See the property management fee.
- An outside construction manager or general contractor, through its fee or markup.
How to check for overlap
Write down every fee tied to the renovation, who earns it and for what. If the property manager charges a supervision fee, the sponsor charges a construction management fee, and the general contractor charges overhead, ask what each one does. The asset management fee usually covers general oversight already. See related-party fees and conflicts of interest.
A worked example (made up)
The numbers below are invented to show the math.
- A 60-unit value-add plan budgets $12,000 per unit for interiors and $180,000 for exteriors: $900,000 of work.
- The operating agreement allows a construction management fee of 5% of costs actually spent, paid monthly as invoices are approved.
- If the whole program is completed, the fee is $45,000. If only 40 units are renovated ($480,000 of interiors plus $180,000 of exteriors = $660,000), the fee is $33,000.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5+ units from their friends and followers under Rule 506(b) or 506(c). Its standard offering documents list each fee the sponsor or its affiliates may earn, so investors see them before signing. DoorRaise also forms the LLC, files Form D and state notices, and verifies accredited investors for 506(c) deals. Escrow is at Enterprise Bank & Trust, an FDIC-insured bank, and investors fund by wire only. See pricing. DoorRaise is not a law firm, broker-dealer, investment adviser, funding portal or bank.
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DoorRaise is built for apartment buildings with 5 or more units: one link for the deal, escrow until closing and a standard fee card.
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FAQ
Is a construction management fee normal?
It is common in value-add deals with a large renovation program. Deals with little renovation often have none.
Is the fee paid at closing?
Usually not. It is paid as the work is done, from the renovation budget held after closing.
Does the fee count toward my return?
It reduces the money available for the work or adds to the budget, so it lowers returns slightly. Projected returns should already account for it.
What if the renovation is cancelled?
A fee based on costs actually spent stops when the work stops. Check the operating agreement for any minimum.
Next step: see how the sponsor's other fees work in how sponsors get paid.
Sources
This article is general information, not legal, tax or investment advice. The example uses made-up numbers. Read the offering documents of each deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.