Commercial real estate investing offers a wealth of revenue-generating opportunities that range beyond what was available to the average investors just a few years ago. Although syndicated real estate deals have been common for ages, digital technology and crowdsourcing have made these investments readily available to everyday investors. These projects involve multiple investors who pool their money and sponsors who facilitate, manage and champion the deals. As an investor, you can earn money by investing in crowdsourced real estate projects, proprietary partnerships, sponsor-offered development deals and projects conceived by groups of friends and associates with common business interests.The number of online investors is growing exponentially, and 74 percent of these are younger–between ages 25 and 49.  Crowdfunding websites include platforms in many countries including emerging markets in Asia, the Middle East and Egypt. Internet sites for syndicated real estate investing include Trulia, Zillow, Yahoo! Real Estate, Google Base, Cyberhomes and many others. You can easily find a syndicated project while investing as little as $100.You can also function as a project’s sponsor and earn sponsor fees in addition to any investment that you personally make, but it’s best to get some experience in this kind of investing before you tackle the demands of sponsoring a large project. Regardless of how you invest or sponsor a project, it’s critical to understand what fees are charged and how they could affect your investment’s return.
How Real Estate Sponsor Fees Work
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Sponsors charge fees based on two forms of compensation: standard fees and “promote” fees, which compensate actively investing sponsors at higher rates of return based on their investments after certain plateaus are reached. Typically, the sponsor proposes a real estate project by finding the property, structuring the deal and performing due diligence. Sponsors can earn money by charging fees for their services, and many sponsors also invest in the project–anywhere from 5 percent to 50 percent of the capitalization needed. The rest of the money is raised from a pool of investors. The funds can be used to buy residential and commercial real estate or manage big-time development projects.
Active-investing sponsors usually earn the same returns as other investors up to certain predefined thresholds. After these plateaus are reached, sponsors earn a disproportionately higher return than the co-investors. For example, each investor earns the same amount until he or she recovers equity and a 10 percent ROI. After that, the sponsor earns 25 percent more than the pro rata share of his or her own investment return until all investors earn 20 percent ROI. The third tier awards sponsors with 40 percent of all excess profits after all the investors have recovered their initial capital outlays and earned a 20-percent return on their investments.
Sponsor Fees Fall into Two Broad Categories
Pools of funds to finance real estate projects are becoming increasingly popular because of digital marketing, crowdfunding and the growing market for huge real estate developments that most investors can’t finance solely with their own resources. Investors increasingly want to invest in tangible assets that aren’t tied to volatile stocks, and large-scale projects offer attractive returns on investment and less risk than smaller projects. The fees for sponsors fall into two primary categories: acquisition fees and asset management fees.
Typical Acquisition Fees for Syndicate Sponsors
These types of fees include those incurred to find and acquire land or property. Although the fee can be split into separate finding and acquisition fees, both are integral parts of the process. Sponsors often investigate dozens of possibilities before finding a suitable investment, and investors should be willing to spend a few dollars so that sponsors can do their due diligence to find the most lucrative deals.
Common Management Fees
Management fees include property, asset and construction management. Property management fees include those incurred while managing daily operations, performing maintenance and repairs and leasing properties. They also cover those expenses involved in running credit checks and performing general upkeep such as landscaping, painting, etc.
Asset management fees include managing daily operations at the property level such as hiring property managers, reviewing and approving capital-level expenditures, monitoring reports, etc. These costs often run between 1 percent and 2 percent of equity or gross revenue annually.
Construction fees involve project management costs such as finding a general contractor and subcontractor, negotiating bids, monitoring monthly cost reports, approving project changes, conducting progress inspections and approving final construction. These costs usually run up to 5 percent of hard construction costs.
Development costs are also included in this category, and they include pre-construction jobs such as environmental testing, getting approvals for building plans, securing zoning approvals, hiring architects and engineers, etc.
Other Sponsor Fees
Each project is unique, and depending on the project’s complexity, there could be many other sponsor fees. Some of these fees might include:
- Third-party broker commissions
- Buyout incentives for recalcitrant sellers
- Disposition fees for liquidating key assets
- Costs of sourcing and identifying assets
- Expenses of developing business plans
- Costs of securing additional financing
- Bank and debit fees
Rapidly Evolving Investment Opportunities Favor Syndicated Deals
Private commercial real estate investing continues to grow, and real estate investing has outperformed stocks by a 2-to-1 margin since 2000.  Explosive growth in senior assisted living facilities, community development projects, urban revitalization, gated communities and public/private development projects generates innumerable investment opportunities that investors can access with as little as $5,000.  Syndicated real estate projects have become increasingly common, and more than 47,000 investors invested in syndicated real estate deals in 2012. 
The opportunities for investors are twofold. Investors gain access to large-scale projects that they couldn’t otherwise afford to access. Sponsors get access to alternative sources of capital for large projects and can even leverage a piece of the action without investing any cash. Regardless of approach, investors need to cultivate an understanding of real estate sponsor fees to make the wisest decisions.
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