Private Placements & Acquisition Fees

The Issue: Fees (well, only 1 of the issues with private markets)

One of the issues with private placements are the fees involved in gaining access to different deals. 

This article provides a framework on what is “normal” and acceptable from an acquisition fee perspective. There are other fees but this is one of the most prominent.

It’s important to note that every deal is different, and just because a deal doesn’t fit directly into a market “fee” amount, doesn’t mean you should automatically invest or decline.

What is an Acquisition Fee?

An acquisition fee is a one-time fee that a real estate sponsor or general partner (GP) charges. It’s meant to compensate the sponsor for the work involved in finding, analyzing, and closing the deal. They earn this fee whether the property performs or not.

Acquisition fees have a large impact on your investment from both a mathematical point of view and an incentive & alignment point of view.

• Basis of the fee: Usually a percentage of the purchase price (confirm for each deal). If based on total capitalization (including capex), the number could be much higher.

• When Paid: At closing, taken directly from equity proceeds (investor contributions).

Transparency

Before we get too far along here, it’s important that a sponsor list all fees associated with the investment up front. If I have to ask what the fees are, it’s a hard pass. There’s no room for deception or lack of complete transparency.

What Sponsors Do to Earn an Acquisition Fee 

• Build deal pipeline: broker relationships, direct owner outreach, off-market programs, auction platforms, repeat sellers, JV partners, lender REO lists.

• Market intelligence: rents/NOI trends, new supply pipeline, permit/starts data, sales comps, land comps, capex cost trends, labor availability, incentives, politics/zoning temperature.

• Brand & credibility: track record packaging, case studies, reference calls, third-party awards/ratings, website/data room hygiene.

• Securities compliance

• LP development: pitch materials, webinars, diligence Q&A, side letters/most-favored-nation, capitalization schedule, closing mechanics.

• Capital stack design

• Lender process: term sheets, applications, third-party reports.

• Financial modeling

• Business plan: unit renovation scope, tiering, premiums, schedule & velocity; amenities/branding; ops clean-up; revenue management.

• Sensitivity/stress test

• PCA & unit walks: MEP/roof/structure; moisture/intrusion; code compliance; accessibility; life safety; elevator; pools; environmental (Phase I/II); asbestos/lead; pest.

• Site/civil: utilities, capacity letters, stormwater, easements/encroachments, flood/wind, traffic/TIA (if applicable).

• Capex plan: line-item scope, alternates, bid-leveling, contingency setting, phasing to minimize downtime.

• Rent roll audit: lease file testing; delinquency/recoveries; concessions; renewal patterns; marketing funnel; reputation data; vendor contracts; property management assessment.

• Taxes & insurance: assessor methodology & appeal path; loss runs; CAT exposures; deductible structure; builder’s risk needs (if renovating).

• Title & survey (ALTA): exceptions, easements, CCRs, encroachments; zoning conformance; nonconformities & cures; litigation; union/labor issues.

• PSA management: reps/warranties, escrows, survival, prorations, closing deliverables, estoppels/SNDAs (commercial), assignment/1031 cooperation.

• Entity formation & org charts: JV agreement (governance, major decisions, waterfalls, promote, removal rights); loan docs; guaranties/carve-outs.

• Day-one ops: bank accounts/treasury, management handoff, payroll/vendor migration, data migration (PM software), resident communications, signage/branding, utility transfers.

• Baseline KPIs & budgets: finalize 12-month operating budget; capex schedule Gantt; weekly dashboard.

Most of the items mentioned above are just what the Sponsor handles prior to closing. The real work begins after closing. It’s demanding, hectic, and should be an incredible amount of work. 

What’s Market?

• Transactions > $100M: Typically 1.0–1.5% acquisition fee

• Transactions $25–100M: Typically 1.5–2.0% acquisition fee

• Transactions $10–25M: Generally ~2% but could move to 2.5% for transactions at the lower end

• Transactions < $10M: Typically 2–3%

As the deal size gets smaller, the percentage of the fee generally increases, as the actual dollar amount will be lower. A 2% fee on a 3 million dollar deal is $60,000 vs. 2% on a 20 million dollar deal being $400,000. If the sponsor doing a 3 million dollar deal wanted to take a 3% fee- I wouldn’t fault them assuming it met all other criteria. 

The Mathematical Impact

As seen in the chart below, the impact on equity is how much a property needs to return just to get you back to “even” on your investment.

Given that most deals aim to generate 15–20% per year, it’s achievable, but is something to pay attention to. 

We have seen plenty of 4% acquisition fees, at high leverage, which is absurd. Think about the impact there! 

The Alignment

Separate from the mathematical impact, but equally important, is the impact on the incentives for the Sponsor.

If a sponsor charges 4% acquisition fees, but “gives” LPs 90% of the upside profit split, are they going to care if the deal performs? They made a lot of their money up front. A 4% up-front fee does not give me any confidence at all that they care how the deal performs.

One of the largest parts of my due diligence process is making sure that the alignment between the GPs and LPs is there. The GP should be making the majority of their compensation if the deal actually performs to a respectable level.

Final Note

I’m not against fees, as they provide income for a sponsor that might help them run their business in a way that allows for better results. A modest fee on a great deal is far better than no fee on a poor deal. Key word = modest.

Feel free to reach out with any feedback whether you agree/disagree! As always if you have any questions- I’m always happy to chat about real estate.