BPI Episode #10: Smart Money Moves: Navigating Fees and Returns in Syndications

Welcome to Building Passive Income, the podcast for professionals, entrepreneurs and investors who want to build wealth, diversify beyond Wall street, and create financial freedom through passive commercial real estate investing. Your host is Wayne Courageous iii, a seasoned investor and founder of CREI Partners, a leading commercial real estate investment company. He spent nearly two decades navigating and educating others on the commercial real estate, from multifamily to storage to retail. Each episode is under 15 minutes, intentionally short, easy to understand, and packed with insights that help you grow your income and protect your capital without becoming a landlord or sacrificing your time. If you're ready to learn fast and invest smarter, you're in the right place. Let's get started.

Welcome back to Building Passive Income Podcast. My name is Wayne Courageous. I'm your host. I'm excited for our next episode. It's really important to understand what the compensation and how general partners get paid. When you go and look at a deal they're going to present, whether it's through a webinar format or an email, whatever it may be, but they should be presenting the business plan. And part of that business plan is the compensation for the general partner. And there's typically rules of thumb. Fees are important. I will tell you on behalf of myself. It's important because it keeps the lights on, it keeps employees employed, it keeps the investment in good hands because you've got income coming in to take care of the property and ultimately that's what matters. We have to have that income coming in to have the staff, have the technology, have all this. So I feel like when people are looking at deals and seeing like, oh, there's fees and such, well, from my standpoint, from a sponsor standpoint, those fees are needed. And again, it's to keep the lights on and keep us focused on the business plan, not focused on other things to survive and try to make money. And I think that's an important thing because at the end of the day, if the fees are reasonable and they're transparent from a passive investor standpoint, that that is really, really important. Because if they're not and they're putting in fees that weren't on the ppm, weren't expected, those are hiding and maybe it's like tough to find. It's like those are things that could be red flags. So when you're looking at the deals, look at it from a standpoint of first off, acquisition fees. So acquisition fees are typically paid at closing, and it's the amount that's typically between 1 to 3% of the purchase price and it's paid up front at closing because there was a huge amount of time of sourcing and closing the deal. A lot of people don't realize, but like when we get deals under contract, we have to put earnest money. And that earnest money comes, becomes hard money after a certain amount of time, meaning if we back out of the deal for whatever reason, we're out that money. And then there's a lot of time and effort that goes into sourcing deals, underwriting, due diligence, et cetera. So all that work to find that one property is what that they're getting paid for on that acquisition. 1 to 3% of purchase price. If you see the 4 to 5%, it may not be completely off because if the deal is small, you know, so these rules of thumb, depending on the size of the deal, like if they're making, you know, a million dollars off of an acquisition like fee, like that could be, you know, some red flags. But if it's, you know, 1 to 2, 3% and it seems reasonable, you're comfortable with it, the returns aren't impacted, everybody's happy. And remember, like that sponsor is using that to continue to operate their business. Find other deals, employ staff members, et cetera, team members, et cetera, to execute on the business plan. So that's a big one. Acquisition fees also asset management fees. So this is a reoccurring fee separate of the property management fee that typically runs 1 to 2%. I typically see 2 to 3% on our side because it just depends on the size of the property. So that again is good income coming in for sponsors like myself, because that is what that reoccurring income again employs the team, keeps the lights on, keeps things going. None of this is to make it wealthy and get out of real estate. That for us is that equity upside because we'll have that preferred return, right? So we're still, the carrot is still there at the end to really make the upside all this other income recurring. You want to see your business partner make money, right. And again, you just don't want them to take advantage and be like overly compensated when the market doesn't support that. Right. And so if you see 1 to 3%, typically 2% is average on a, you know, 100 plus unit property. But if it's a 30, 40 unit, you may see a 3% asset management fee and that's going to be on gross revenue. One of the things I've been seeing a little bit of lately, not so much typically it's a percentage of the gross Revenues, But I've been seeing some people do they're doing a percentage based on total equity raised. And I don't know, it's. To me, I don't really like that because the carrot should be on gross income, not just total equity rates. So I always like to have more alignment and more incentive base. And so that's just something, hey, if you're comfortable with it as a passive investor, you know, that's great. But you just need to know, you know, all the different types of fees. So acquisition fees, asset management fees, that's more of the reoccurring. Then we get into the equity split. So I mentioned a preferred return prior on another podcast episode. But just to recap, a preferred return is the return that goes to our investor first or to the investor first before there's any participation from the general partner. So the LP say the preferred return is 7%. So 100% of the cash flow goes to the limited partner until they get that full 7%. So if year one's at 4, then we have to pay the next, you know, 7 plus prior year 3%. Right. It accrues before the general partner gets any of that. But say after that 7% preferred return. Private placement memorandum. The legal documents show that after that 7%, between 8 to 18%, it splits 75% limited partner, 25% general partner. Well, now you have the general partner participating in the equity upside, and that's a good thing. Like that means the property's cash flowing, everybody is making money, and we're all incentivized. Like, we're all trying to grow more revenue. And that is what I love about the preferred return model is that investors get 100% up to their preferred return. And then it's a waterfall. Clear. It's an 80 or 75, 25 or 70, 30. You know, sometimes it's an 80, 20, depending on if it's a higher investment. Maybe there's an asset class within that deal. If you put in a 100,000 or more, you're getting an 8020 split. So whatever that is, it's something to be mindful of. And then at the exit, let's say that. And then it could be another waterfall. Maybe it goes to another 18% and then it split 50. Right. So there's those waterfalls. But that equity split, also known as the promote, is something to look at and something that you will see on deals. Now, maybe they don't have a preferred return and it's simply a 60, 40 split or 50, 50. That's okay. Too whatever you're comfortable with from a revenue and return standpoint and your alignment with that sponsor team, because everybody's going to have a different and on how their investors are going to be compensated. The biggest thing is, is like, unless you're like the one big investor, it's hard to negotiate this. So you either it either works for you or it doesn't. And if it doesn't work for you, that's okay. You just go find a sponsor who's more aligned with the type of splits and returns that you're more comfortable with. Right. So another way that the general partners makes money typically is at a refinance or a sale. Typically, it could be like a 1% of proceeds. And really I view that more as like the amount of work it takes to go through a sale process and go through a refinance. It's a compensates the time to go through that. Right. So you have the asset management, which is ongoing, going weekly, calls weekly operations, taxes, getting the K1s for investor tax purposes, et cetera. And then you have added responsibilities of doing a refinance sell the property. And so that really helps the sponsor just cover costs that they've incurred. Why does all this matter to you? To understand how all these compensations. Well, it matters to you because you want to make sure that the fees that you're getting are reasonable and that they can truly support why they feel like they need to charge anything above and beyond. I'll give you an example. For me, like one of our properties, it was a 44 unit in Houston. When I did the acquisition fee, I did a 3% acquisition fee because the amount of effort and time for our company to make sense, you know, 3% was that number. Like that's what it came down to. Right. But at the end of the day, it was okay. And our investors happily were fine with it, even though they typically see 2% because they were still getting incredible returns and they know the amount of work and effort that goes into finding that deal. Right. So those are just things. You just want your sponsor or the general partner be very transparent. All the stuff that I'm talking about are typically found in your private placement memorandum. It's also found in the company agreement. So we'll talk about those type of agreements in a later podcast. But the business plan know that like the four corners of that private placement memorandum, which would include a subscription agreement and a company agreement, no matter what a podcast says or a Facebook post says, that what's in that document is what really matters. Acquisition fees, asset management fees, refinance or sell, these are all very common fees. And again, it's what feeds our family as a sponsor while we find and source investment opportunities for you and while you're getting those preferred return and those great cash flow and the tax depreciation. So I just think it's very important to be very transparent and understand what is reasonable and what is not. And ultimately, if people feel like it's not reasonable, that's okay. There may be someone else does less or maybe doesn't do any at all. Or maybe real estate. Passively investing is just not a thing. But if you think about like every investment manager out there, there is a fee to it, right? And so understanding like that is part of the business cycle for both the general partners. So that way we can get those returns and focus to the limited partners. So hopefully that helps understand how we make money and how we' for CR partners, how we are aligned in a way to maximize your return. So that way we can get participation and what we call the promote the equity upside. I want to also continue pushing on the fact that conferences, through meetups, through books, through this podcast, through all these things, you are getting educated in a sense that you are going to be ready to launch to your first passive investment or maybe your 40th passive investment. But all these things that you're doing are taking the right steps. Please, if you find that this is valuable, share this with your friends, share this with your family and you know, have people subscribe and like our content because we are trying to do this in a way of there's nothing in return that we're not looking. I mean, we would hope for investors to come this way, but really the passion is just to educate investors so they're making and you're making the best decisions that works for you and not getting caught up in a deal where you didn't have the clear lenses to truly assess and see. Like a deal is truly a deal. I hate that word deal. It's like, yeah, we got a deal. Until you start looking at it, like, yeah, it's not so much a deal. So one other thing, just plug in for passiveinvestorcoaching.com this coaching program is free. It's a lot of videos of hours of content and it really just accelerates. It's another level to get investors who are excited about building passive income. So check out passiveinvestorcoaching. Com. It of course talks about CR partners, about what we're doing, but heavily into, you know, how to evaluate a deal, how to underwrite a deal sponsor how to, you know, look at properties remotely, like what websites to look at if you're interested in even evaluating a property without getting on a plane and heading to that city in that submarket. So hopefully this is great content. Again, please subscribe and like and excited for the next podcast here coming shortly.

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