Real Estate Syndication Fees and Preferred Return Explained

In a real estate syndication, the sponsor earns fees for running the deal plus a share of profits, called the promote, after investors receive a preferred return. Industry sources commonly cite acquisition fees of 1% to 3% of the purchase price, asset management fees of 1% to 2%, a preferred return of 6% to 8%, and profit splits of 70/30 or 80/20 in investors' favor. The details vary by deal, so compare them in dollars.

What fees do syndication sponsors charge?

Ranges differ by source, but these are the common ones:

Fee	What it pays for	Common range
Acquisition fee	Finding, underwriting and closing the deal	1% to 3% of the purchase price, per BiggerPockets and SponsorCloud
Asset management fee	Overseeing the property and reporting to investors	1% to 2% of revenue or equity; SponsorCloud cites up to 4% of gross revenue
Construction management fee	Managing renovations	5% to 6% of hard construction costs, per SponsorCloud
Refinance fee	Arranging a new loan	0.25% to 1% of the loan amount, per FNRP
Disposition fee	Selling the property	1% to 3% of the sale price, per SponsorCloud
Property management fee	Day-to-day operations, often paid to a third party	A market-rate share of collected revenue

On top of fees, the sponsor earns a share of profits above the preferred return.

What is a preferred return?

A preferred return is the rate investors must receive before the sponsor shares in profits. As syndicator Brian Burke puts it for BiggerPockets, "Preferred return simply means that the investor is in a preferred position." Willowdale Equity says most multifamily deals set it between 6% and 8%, and adds: "The preferred return is not guaranteed." If the property doesn't earn enough cash, investors don't get it that year.

There are two kinds:

Cumulative: unpaid amounts carry forward and must be paid before the sponsor shares in profits.
Non-cumulative: if a year falls short, the shortfall is gone.

How a syndication waterfall works: an example

Take a deal with $2,000,000 of investor equity, an 8% cumulative, non-compounding preferred return and a 70/30 split. The pref is $160,000 a year.

During the hold:

Year	Cash available to distribute	To investors	Unpaid pref carried forward
1	$120,000	$120,000	$40,000
2	$200,000	$200,000 ($160,000 Year 2 pref + $40,000 unpaid from Year 1)	$0

At the sale, say the property nets $3,000,000 for the equity after the loan is paid off, with every pref paid to date:

Investors get their $2,000,000 of capital back.
The remaining $1,000,000 is split 70/30: $700,000 to investors and $300,000 to the sponsor.

The order can differ by deal. Some waterfalls return capital before splitting operating cash, and some add tiers that raise the sponsor's share above certain return hurdles. The operating agreement controls.

What does a fee card look like in dollars?

Here's the format DoorRaise uses, from our fictional sample deal page for a $7.4 million, 64-unit building:

Fee	Amount	In dollars
Acquisition fee	1.5% of purchase price	$111,000 at closing
Asset management fee	1.5% of collected rent	About $14,000 a year
Disposition fee	1% of sale price	At sale only
Profit split	70% investors / 30% sponsors	After an 8% preferred return
DoorRaise fees	$7,500 launch (raises up to $5M) + $300 per investor a year + $95 per accreditation check	Paid by the deal, flat

This is an example, not a real offering.

How should investors compare fees?

Add up the dollars. A 2% acquisition fee on a $10 million purchase is $200,000.
Check what the fee is based on. A percentage of purchase price, equity, revenue or committed capital can mean very different dollar amounts.
Look at the sponsor's own money in the deal. A sponsor investing on the same terms as you is better aligned.
Read the waterfall. Find out whether the pref is cumulative and when capital comes back.

See how to vet a syndication before you invest.

How DoorRaise shows fees

Every DoorRaise deal will show fees in the same format with dollar amounts, so investors can compare deals. DoorRaise's own fees are flat and listed on the same card. We take 0% of the raise.

DoorRaise isn’t open to the public yet.

Built for apartment buildings with 5 or more units: one link for the deal, escrow until closing and a standard fee card.

See the example fee card See pricing

FAQ

What is a typical acquisition fee in a real estate syndication?

Industry sources commonly cite 1% to 3% of the purchase price, paid at closing.

What does an 8% preferred return mean?

Investors receive the first 8% a year of returns on their invested capital before the sponsor shares in profits. It's a priority, not a guarantee.

Is the preferred return guaranteed?

No. It's paid only if the property produces enough cash. A cumulative pref carries the shortfall forward.

What is a promote in real estate?

The sponsor's share of profits above the preferred return and return of capital, such as 30% in a 70/30 split.

What is a 70/30 split?

After the preferred return and return of capital, investors receive 70% of the remaining profit and the sponsor receives 30%.

Sources

This post is general information, not investment advice. DoorRaise is not a broker-dealer, investment adviser or funding portal and does not recommend any offering.