Some of our investors have been around commercial real estate for decades, if not their entire professional careers. Others, not so much. Regardless of how much experience you have investing in real estate projects, the new world of online investing platforms is relatively new, and the process of distributions and assessment of fees can be confusing, especially as it varies across platforms and deal types. We’d like to take a moment to elucidate how our fees are assessed. Before getting into the nitty gritty, a few general notes on investor fees on EQUITYMULTIPLE deals

  • All Return Projections are Net of Fees: In other words, if you see a 12% projected annual cash return and a 19% projected IRR, these figures are projecting the final return, after the sponsor and EQUITYMULTIPLE have taken any applicable management fee and carry.
  • Documentation: Each investment is accompanied by an Investor Packet (if you’ve invested via EQUITYMULTIPLE, you’re familiar with this document). While this documentation delineates assessment of fees, it is, admittedly, quite lengthy. We’re always happy to address questions directly via support@equitymultiple.com or via the the in-app chat feature.

 

Here is a summary of fees on EQUITYMULTIPLE:

 

Equity Deals

  • 2% Placement Fee (EM Commission) – Paid by Sponsor
  • 0.5-1.0% Annual Asset Management Fee – Paid by Investors Annually
    • This gets returned to investors who bring a friend on board for an investment
  • 10% carry on total profit of deal

Preferred Equity Deals

  • 2% Placement Fee (EM Commission) – Paid by Sponsor
  • 1% spread off total preferred return – Paid (or Accrued) by Investors Monthly
    • This gets returned to investors who bring a friend on board for an investment

Debt Deals

  • 2% Placement Fee (EM Commission) – Paid by Sponsor
    • 1% spread off interest rate – Paid (or Accrued) by Investors Monthly
  • This gets returned to investors who bring a friend on board for an investment

 

On to an example. Let’s consider our luxury condo development project in Santa Monica, California. This deal is projected to generate a 26-40% IRR to investors over a 2-year term. As always, this range of returns is net of fees and carried interest. Let’s consider an investment of $10,000.

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  • The Annual Asset Management Fee is 1% for this deal, amounting to $100 per year per investor, and $200 total to EQUITYMULTIPLE. This annual fee will be in the range of 0.5% to 1.0% for equity deals, so this one falls right in the middle. While this isn’t a negligible amount of money, it’s well below what a hedge fund or privately-held REIT would charge per annum. Additionally, in the case of development or redevelopment deals such as this one, this fee will accrue until distributions are made to investors.
  • As is typical of all EQUITYMULTIPLE deals, capital will be reimbursed 100% pro rata to the Investor Members until all invested capital has been returned. In the case of this project, this disbursement takes place upon sale, at the conclusion of the project. Remember that EQUITYMULTIPLE doesn’t earn any upside until all investors recoup their initial capital contribution.
  • The EQUITYMULTIPLE carry on this deal is 10%. So, after every penny of the $750,000 in total initial capital contribution is returned to EQUITYMULTIPLE investors, the remaining profits are split 90%/10% between EQUITYMULTIPLE investors and EQUITYMULTIPLE. In the base case scenario that we’ve modeled for (involving rigorous underwriting), there will be $492,917 in profit remaining for EQUITYMULTIPLE 21, LLC upon sale of the property and after all prior parties in the capital stack are paid. This is then split 90% ($443,625) pro rata to our investors, while EQUITYMULTIPLE keeps 10% ($49,291). In the case of a hypothetical $10,000 investment in this project, you would receive a proportional share of that amount ($15,915), i.e. a net 26% IRR, at the conclusion of the 2-year term.

 

While the distribution waterfalls you see presented in the Investor Packet can be a bit confusing, it’s never our intention to mystify investors. If you ever have questions about how and when distributions are made to investors for a particular deal, we’re happy to discuss, and there are no bad questions.

By EQUITYMULTIPLE Staff
EquityMultiple's team features real estate industry veterans, technology-driven analysts, and dedicated armchair economists.
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