Fees in a private real estate deal: where the money goes

A private real estate offering does not charge one fee. It charges several, some of them to the sponsor itself, and the memorandum probably describes them in four or five places without adding up the total. What follows walks those lines in the order the money is taken. It is written by Metropolitan Holdings, which performs most of this work in house rather than buying it in.

Fees are not one number

Compensation is taken at several points, on different bases:

• Acquisition fee. On the land purchase, at closing.
• Development fee. For carrying a site to a finished, occupied building.
• Construction compensation. General conditions and the contractor’s fee, inside the budget rather than the fee schedule.
• Financing and guarantee fees. For arranging the loan, and for signing the guarantee it requires.
• Property management fee. Monthly, once the building operates.
• Asset management fee. For running the investment rather than the building.
• Disposition or refinancing fee. At the exit, where the documents provide for one.
• The promote. The sponsor’s share of the profit, after conditions.

Only the last depends on the investment working. Everything above it is paid whether the outcome is good or bad, which is why one summed number tells you little.

Acquisition and development fees

An acquisition fee pays for work done before the deal existed: finding the site, negotiating it, running the diligence that decides whether it can be entitled and built, and closing it. It is usually struck on the purchase price, sometimes on total project cost, and taken at closing.

A development fee is different in kind, and the one most often misread. It is compensation for work performed over the years between a site and a stabilised building: entitlement, design management, permitting, bidding, construction oversight, and the coordination of lease-up — not a spread taken at closing. It is normally a percentage of total project cost, sometimes of hard cost alone, and one written on total project cost rises with land, financing, and soft costs that nobody builds.

The question is not only how large it is but when it is paid. A fee taken whole at closing turns years of future obligation into cash on day one and leaves nothing in the sponsor’s hands to lose if the job goes badly. Ask whether the draw is tied to construction progress, whether it is capped, and whether part of it is deferred behind investors.

Construction

Construction compensation sits inside the budget rather than in the fee table. General conditions are the cost of running the job site rather than of building anything on it — supervision, temporary power, fencing, safety, insurance, cleanup — a cost line rather than a profit line, and one that scales with the schedule. The general contractor’s fee is the builder’s overhead and profit.

Neither is evidence of anything on its own. The line that carries information is who the builder is: where the general contractor is under common ownership with the sponsor, a signed contract proves nothing about the price, because both signatures came from the same building. What proves something is a test against the market — work competitively bid with the bids shown, a maximum price fixed by contract with savings returned to the deal, or open books on the trades.

This applies to us as squarely as to anyone. We build and manage what we develop, so the communities and the construction and property management teams are our own.

Property management fee

Once a building is open, whoever operates it is paid a share of the revenue it collects. Read the basis: a fee on collected revenue falls when collections fall; one on scheduled or gross potential rent does not. Through a lease-up, as collections climb from near nothing, that is not a small difference.

The fee is also rarely the whole cost of management. Look for leasing commissions, a construction management fee on capital projects, and on-site payroll, which should be reimbursed at cost rather than marked up.

Asset management, and the base it is charged on

Asset management is not property management. The property manager runs the building: leasing, maintenance, collections, residents. The asset manager runs the investment: the capital structure, the lender relationships, investor reporting and K-1s, the timing of a refinancing, and the decision to sell.

The base decides the amount:

• Committed capital. Charged on everything subscribed from the first day, including money not yet called into a project.
• Invested capital. Charged only on money actually deployed.
• Gross asset value. Charged on the assets’ value, which includes the portion funded by debt, and so rises with leverage.

That bites harder in development than in an acquisition fund. Capital that buys a standing building is deployed at one closing; development capital goes in slowly, called as sites close and construction proceeds, because development is a different investment from buying an existing building. The same rate on committed and on invested capital produces very different totals.

The promote, and why it is the one that matters

Every fee above is paid for work. The promote is paid for outcome, and in a deal that goes well it can be the largest of them. What matters is not the size of the split but the order of the steps before it: cash fills each tier of the waterfall before any reaches the next.

1. Return of capital. Investors receive their contributed capital back.
2. The preferred return. Investors receive the accrued preferred return — an accrual payable from available cash flow after debt service and reserves, a priority in the queue rather than a guarantee of payment. Whether that accrual compounds, and what happens to it if the hold runs long, are matters of definition rather than of rate, taken up in how a preferred return accrues, and what it does not entitle an investor to.
3. The catch-up, where there is one. The sponsor receives distributions until it holds its agreed share of the profit paid so far.
4. The split. What remains is divided, sometimes with a further hurdle above which the sponsor’s share rises.

Read that sequence in the operating agreement, not the summary of terms. The cost of the promote is set by the ordering: whether it sits behind a full return of capital or only behind the preferred return; whether the waterfall runs project by project, since a deal-by-deal promote can pay the sponsor on the projects that worked while the others are still open; and whether there is a clawback.

A waterfall of this shape is an equity structure; a lender does not stand in it. A debt position is paid interest while its loan is outstanding and does not share in the profit above that. We run one fund of each kind, and both sets of terms sit on the funds page.

What integration does to this list

Development, construction, property management, and investment are four teams inside one company here, so more of the lines above are performed inside the firm than bought from a third party. Stacked margins are a real cost, and one firm accountable from underwriting through lease-up has nowhere to pass a problem to. But a fee set between two parties under common ownership is agreed with the party receiving it, so disclosure is the minimum rather than the test. The test is benchmarking: a scope and a fee a third party would recognise as ordinary for the same work, shown rather than asserted.

Which lines carry a fee, on what basis, and at what rate is a question for the documents, not for a page like this one. The construction contract carries the price and how it was arrived at; the offering documents carry the fee schedule and the related-party terms; the management agreement carries the management basis and everything billed beside it. Ask for all three, or ask our investor relations team to walk you through ours.

Fee drag against a public alternative

An investor comparing this with a listed vehicle wants the two costs side by side, and they do not compute. An expense ratio is one number, charged continuously, on one base. This is several, on different bases, at different moments, one inside a construction budget and one contingent on an outcome that has not happened. Folding a contingent promote into a single ratio prices a cost that may never be charged — and whether it is charged in a poor result depends on the ordering above, not the headline split.

The comparison that works is net: what reaches the investor after everything is paid, against what the alternative pays after its own costs, and after tax — which in a development’s first years is a subject of its own, covered in why a new building reports losses while it is leasing well.

What to ask before subscribing

• Is the general contractor, or any other paid party, under common ownership with the sponsor, and against what benchmark was the price set?
• Is the development fee struck on total project cost or hard cost, drawn across construction, capped, and part-deferred?
• Is the asset management fee charged on committed or on invested capital?
• Does the promote sit behind a full return of capital, is the preferred return cumulative, and is there a clawback?

Fees are paid whether or not the investment performs, and in a deal that disappoints they reduce what is left further. They are also the smaller variable: construction cost and schedule, the pace of lease-up, and the rate when short-term development debt is replaced move an outcome more than a fee schedule does, and none of the three is knowable when the money goes in. Interests of this kind are illiquid, are not freely transferable, and have no public market; investors may lose some or all of their capital. Returns are not guaranteed.