Acquisition Fees: What the Base Changes, and What to Compare Them Against
A fee paid at closing, before the asset has performed at all, on a base defined three sections away from the percentage that everybody quotes.
The acquisition fee is the first payment a sponsor receives and the one least connected to outcome. It is earned at closing, before the business plan has begun, and it is paid out of the money the investors just contributed.
That is not an objection. Sourcing a property, underwriting it, negotiating it, arranging debt and closing is months of work with real cost and a meaningful failure rate — most pursued deals do not close, and the ones that do have to carry the ones that did not. Being paid for it is ordinary.
What is worth attention is that the fee's size depends on a definition most readers skip.
The base is the variable¶
Three bases are common, and the same percentage produces very different dollars.
The pattern is worth noting: a fee charged on total project cost rises with the capital budget, which is a mild incentive in a direction nobody intends. A fee on purchase price does not.
What to compare it against¶
An acquisition fee in isolation cannot be assessed, because there is no published benchmark this site is willing to cite. Three comparisons within the deal itself are more useful than any external number.
Against the sponsor's co-investment. If the fee exceeds the contribution, the sponsor's net cash position at closing is positive. See skin in the game.
Against the total fee stack. The acquisition fee is one component; the analysis that matters is the total across the hold, compared with what the sponsor earns from a deal that merely returns your capital.
Against the equity raise. Expressed as a share of the money investors contributed rather than of the purchase price, the fee looks different. A $200,000 fee on a $2,500,000 raise is 8% of the equity, and it is the equity that funds it.
| Way of expressing the same $200,000 fee | Figure |
|---|---|
| Of the $10,000,000 purchase price | 2.0% |
| Of the $11,500,000 total capitalization | 1.7% |
| Of the $2,500,000 limited partner equity | 8.0% |
| Against a $125,000 sponsor co-investment | 1.6 times |
When the fee is paid, and out of whose money¶
A detail that changes how the fee should be read: it is paid at closing, out of the offering proceeds.
That means it is not funded by the property's income, not funded by the lender, and not funded by the sponsor. It is funded by the equity the investors just contributed, which is why expressing it as a share of the raise rather than of the purchase price is the more revealing figure.
It also means the fee is earned before a single business-plan decision has been made. The sponsor could underwrite badly, buy at the wrong price and execute poorly, and the acquisition fee would still have been paid in full on the day of closing.
None of that makes it improper. It makes it a transaction fee, and transaction fees create transaction incentives: they reward closing deals rather than closing good deals. Every fee structure creates some incentive, this is the one this fee creates, and it is the reason a sponsor's co-investment and the subordination of its back-end fees carry so much weight in the alignment analysis.
The reconciliation nobody does¶
One five-minute check that occasionally produces a conversation.
Take the percentage and base from the fee schedule, calculate the dollar figure yourself, and compare it against the acquisition fee line in the sources and uses.
They should match exactly. Where they do not, one of three things is true: the base is defined differently from how you read it, the sources and uses table reflects a later version of the deal, or somebody made an arithmetic error in a document that a hundred people will rely on.
All three are worth knowing, and the third is more common than it should be.
Where to find the answer¶
Three places, and they are not the same place.
The fee schedule in the memorandum gives the percentage. The definitions give the base — look for a defined term such as Total Project Cost or Total Capitalization and read what it includes. The sources and uses table gives the actual dollar figure at closing, which is the only one of the three that is not a formula.
If the three do not reconcile, that is worth raising. It is usually a drafting inconsistency rather than anything else, and a sponsor who cannot reconcile their own fee schedule with their own sources and uses has told you something about the care taken with the rest of the document.
Primary sources
Every factual claim above is traceable to a filing, a rule or an agency publication. These are the ones this article relies on.
Questions readers ask
What is an acquisition fee in a syndication?
A one-time payment to the sponsor at closing for sourcing, underwriting and executing the purchase. It is paid out of the offering proceeds rather than from operating cash flow, which means it comes from the investors' contributed capital.
Is an acquisition fee normal?
Yes. Finding and closing a property is real work and it is customary to be paid for it. The questions worth asking are about the base, about whether an affiliate is also earning a commission on the same transaction, and about the total in the context of the whole fee stack.
What base is the fee charged on?
It varies. Purchase price, total project cost, or total capitalization including reserves and fees. The same stated percentage produces materially different dollars depending on which one, and the base is defined separately from the rate.
Can a sponsor charge an acquisition fee and a brokerage commission on the same deal?
It happens, where an affiliated brokerage represents the transaction. It must be disclosed as a related party transaction. Whether it is reasonable is a judgment, but it should be visible and it should be added to the total.
Does the acquisition fee reduce what I own?
Effectively yes. It is funded from the equity raise, so a portion of your contribution buys the fee rather than the building. The sources and uses table shows the proportion.
Read next
- SponsorsHow to Evaluate a Sponsor Before You WireIn a passive investment the operator matters more than the asset, because you are buying their judgment for years. Most of the work is documentary.
- SponsorsReading a Track Record: Full-Cycle Deals vs Deals Under ManagementA record of twelve deals with two completed exits is a record of two deals. The other ten are estimates produced by the person asking you for money.
- SponsorsSkin in the Game: How Much GP Co-Investment Is MeaningfulThe percentage of the raise is the wrong measure. What matters is the proportion of the sponsor's own net worth, and whether the money came from outside the deal.