Since the syndicator only gets paid when the asset is cash flowing, there isn’t much incentive to take on difficult projects. If there is a major rehab project a fee can be imposed to compensate the project manager while the asset isn’t producing income.
It can vary but is often 1-2% of the construction cost.
There are a lot of competing interests in a deal and it’s difficult to align everyone 100% of the time – that’s why trust must be built with anyone that you’re investing with.
But, a few major points to consider are how all the fees and the preferred return and waterfall all fit together.
He said he likes to have an 8% preferred return for the majority of his 450 door portfolio.
It “gives some certainty to investors about their overall returns.
But, deals that compensate the sponsor more will create more incentive to produce high returns.
That’s why there are so many different ways to structure deals!
That can sometimes put unnecessary risk on the asset if they are being to aggressive.
We have steered clear of preferred returns mostly because those are usually accompanied with up-front fees charged to investors.