Hamel Interests and Private Equity, LLC
4634 Fairfield Ave. Shreveport, La. 71106
318.868.4921 office

Asset Management

Hamel Interests and Private Equity, LLC seeks full or majority interest in real estate and small to medium-sized enterprises and will provide asset management service to all assets. Value is created on many fronts, while being sensitive to day-to-day management operations.

There are two main types of fees in real estate investment management: Transaction fees; and Performance-based fees.

Value Creation Timeline

I. Transaction fees

Transaction fees are guaranteed. The manager gets paid these fees regardless of how the deal performs. Below are the most common transactional fees:

i) Acquisition Fee
ii) Investment Management Fee
iii) Set Up and Organizational Fee
iv) Administrative Fee
v) Debt Placement Fee (Broker)
vi) Refinancing Fee (Banks)
vii) Selling Fees (Brokers)

Acquisition Fee: This fee is most common amongst managers syndicating individual deals. The acquisition fee is usually between 1% and 2% of the total deal size and is generally on a sliding scale. The bigger the deal, the lower the fee. This is a market rate fee and is justified because the manager probably looked at 50 deals to find this one. The manager already paid all of the dead deal and personnel costs out of their own pocket. Acquisition fees are paid on the total deal size, as opposed to equity invested. This is a significant difference because a 1% acquisition fee on a $30 million property comes out to $300,000. Most properties are typically leveraged using two-thirds debt, so the required equity may only be $10 million, meaning that $300,000 fee equates to a 3% cost of equity invested.

Investment Management Fee: This fee is charged by both fund managers and managers sponsoring individual deals and is sometimes referred to as the Asset Management Fee. For real estate funds, this fee replaces the committed capital fee once the capital is invested so that investors are not being charged on the same capital twice. The commitment fee is reduced proportionally as money becomes invested. This fee ranges between 1% and 2% of invested equity and is used to pay for investment management services. This fee should be a function of invested equity and not total deal size.

Set Up and Organizational Fee: Both real estate funds and managers of individual deals incur set-up costs. These are typically passed through to the investment entity and paid by all investors. One-time upfront costs include legal, marketing, technology, investor relations, and other costs associated with capital raising and forming the investment company. This fee is typically between .5% and 2% of total equity. For individual deals, these are generally not a line item easily identified in the marketing materials and are often costs that are lumped into the property’s acquisition cost. Investors should be aware of this line item and ask the manager to explain the terms in specific detail to know exactly what this fee is being used for.

Administrative Fee: These fees cover tax reporting, audits, fund administration and third-party software. They typically range between .10% and .20% per year on invested equity.

Debt Placement Fee: This is a fee that is often paid to an outside broker, which is standard industry practice for lining up debt. The typical fee is between .25% and .75% of total debt, depending on deal size. A good broker can save a project a lot more than the cost of this fee. However, some managers try to layer on their own internal fee on top of a debt placement fee to the tune of between .25% and .75%. This is very impactful to equity, as the amount of debt used in a typical transaction is two times larger than the amount of equity.

Refinancing Fee: This is similar to a debt placement fee and some managers charge between .25% and 1% for this service.

Selling Fees: It’s always good practice to take a project to market to generate the highest value. Typically, brokers are paid between 1% and 3% of sales price, depending on project size. Some managers charge their own internal fee between .25% and .75% on top of that.

While this may seem like a lot of fees, a good manager will limit what fees they charge and how much. Transaction fees are meant to keep the lights on but not be a profit center for the company. While we don’t believe fees should guide a decision, they can tell you something about the manager. A manager trying to extract every last penny out of the deal through guaranteed transaction fees is a clear sign that they don’t have the investor’s interests in mind.

II. Performance-Based Fees

Performance fees are variable, based on the success of the real estate investment. They are common in nearly every private equity investment — even beyond real estate — and are used to align the interests of the manager with those of the investor. The typical performance/incentive fee entitles the manager to between 15% and 30% of profits.

An investment waterfall is a method used in a real estate investment to split the cash profits among the manager and the investor to follow an uneven distribution. In most waterfalls, the manager receives a disproportionate amount of the total profits relative to their investment. For example, a manager may only put in 5% of the investment capital but be entitled to 20% of the profits.

Performance fees are usually subject to what is called a preferred return hurdle, which is the rate of return tier (usually as defined by a certain IRR or equity multiple) that must be met before the manager begins to participate in the profits. These tiers are what define the various profit splits. The preferred return typically ranges from between 7% and 10% annually and can be viewed as an interest rate on investor capital, but it’s not guaranteed.

There are two common types of waterfall structures used in both real estate funds and individual deals — European and American. In a European waterfall, 100% of all investment cash flow is paid to investors in proportion to the amount of capital invested until the investors receive their preferred return, plus 100% of invested capital. Once these distributions have been paid out, then the manager’s portion of the profits increase. This is the most common waterfall used in real estate fund structures.

In the American waterfall, the manager is entitled to receive a performance fee prior to investors receiving 100% of their capital back, but usually after receiving their preferred return. To protect investors, there is usually a caveat in the documents that states the manager is only entitled to take this fee so long as the manager reasonably expects the fund or deal to generate a return in excess of the preferred return. It’s not uncommon for income products that have longer hold periods to be structured with this type of waterfall or deals with hold periods that are longer than 10 years.

When vetting private real estate investment opportunities look for a fee structure that is largely performance-based, so the manager wins when the investor wins. There is a difference between fees that are used to create investment value and exorbitant fees that simply make the managers of private equity real estate funds wealthy at the expense of their partners. But in the end, fees should guide — not drive — an investor’s decision about whom to invest with. What matters most is the return on investment after all fees are considered and if that is an appropriate return for the level of risk.