Equity returns must be evaluated on a risk- adjusted basis, which simply means evaluating returns within the context of the risk associated with potentially achieving those results. On the equity side, investors must also ensure that their deal is properly structured to align interests between the sponsor and investors. Both parties should seek to structure/participate in a fair deal with an appropriate fee load as well as a fair performance compensation structure, otherwise known as a waterfall. An acquisition fee is paid at closing to the deal sponsor, or the individual/company responsible for putting the deal together and managing it after closing. Acquisition fees should be between 1% and 2% of the purchase price of the property. Anything greater than 2% should be justified via a unique strategy or value proposition. Asset management fees are ongoing and are usually 1% to 2% of the property’s revenue. It is important for an investor to understand the deal’s entire fee structure and ensure it is fair when evaluated in its entirety. The best deal structure includes a preferred return which provides equity investors a
INVESTORS MUST ALSO ENSURE THAT THEIR DEAL IS PROPERLY STRUCTURED TO ALIGN INTERESTS BETWEEN THE SPONSOR AND INVESTORS.
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