Why do Deal Sponsors Charge Fees?

By Greg Brown, Registered Representative at VENTURE.co Brokerage Services, LLC.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of VENTURE.co.

Putting together a real estate deal is similar to herding cats. But only if those cats are like the ones in the cult classic film Roar, in which a family and its pets, untamed lions (among other animals), are profiled. 70 members of the cast and crew were injured.

And I’m equating this to putting together a real estate deal? I kid. But not by much.

By the time a deal is ready for the investment stage, a sponsor has gone through many hoops to put it together. Saying it’s a lot of work is an understatement.

Now, when I say “deal”, I’m not talking about the creation of marketing slicks and 10-year discounted cash flows. I’m talking about the entrepreneurs who have a vision for a property or project and, at significant risk, attempt to create a vehicle for investment.

You get what you pay for in life. Except in Vegas, where you pay double.

In my view, the long-standing, inefficient sausage-making process that brings a deal to market, by its very nature, requires compensation. If something is easy, anybody can do it. But putting a real estate deal together is, once again, hard work and deserves just compensation.

Because here’s the reality: most opportunities die before they even get close to the stage for raising capital.

I bring this up because too many investors immediately zero in on the fees a sponsor charges in a deal. To me, this is wrongheaded. Here’s why: if a deal sponsor has a solid track record and is offering investors returns commensurate with the risk, “pay that man his money” (-Teddy KGB in the best scene of Rounders).

This doesn’t mean you should brush over a deal’s fee structure. You should focus on it. Just be smart about analyzing it.

  • Make sure the sponsor’s fees aren’t too heavily front-end loaded. The sponsor should have skin in the game down the line, when things could potentially go bad.
  • Is the deal sponsor using fees earned as equity in the deal? If yes, this is not necessarily a bad thing. It shows the sponsor is willing to put their money where their mouth is—and that is a good thing. I would be much more concerned if a sponsor charged a high fee, up front, with little or no reason for the sponsor to ensure the project’s success in the future.
  • When comparing different investments make sure the returns you are comparing are both before fees and after fees. Sponsors are required to disclose all fees. However for return calculation purposes, some sponsors may present the returns not inclusive of all fees associated with a deal. Just make sure you know what the returns are projected to be NET of ALL fees.

If an investment fits your investment goals and has the fundamentals to be successful, don’t be in a hurry to prejudice that deal because it has a significant fee to the sponsor. You get what you pay for in life. Except in Vegas, where you pay double.

This publication is a service to our clients and friends. It is designed only to give general information on the developments actually covered. It is not intended to be a comprehensive summary of recent developments in the law, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.

Leave a Reply