What Are Equity Placement Fees?
When modeling real estate projects for any asset class, there are many fees that should be considered. One fee that is commonly forgotten is the equity placement fee, also known as the equity origination fee.
What is an Equity Placement Fee?
An equity placement fee, commonly referred to as an equity origination fee, is a fee charged upfront by a broker to obtain limited partners, equity investors, or some sort of silent partner. When a real estate project is being underwritten part of the project is funded by debt (a loan from the bank) and the rest is funded by investor equity as well as general partner equity. If the GP does not readily have investors accessible they hire brokers to find limited partners. The GP must then pay a fee to the broker, similar to a finder’s fee, for finding investors to put equity into the project. Equity placement fees are typically anywhere from 0.5% - 2% of the total equity requirement.
Why Are Equity Placement Fees Important?
Although equity placement fees may not be applicable towards a project, it is important to consider whether it should be included or not. If investors are readily available an equity placement fee is not applicable. If equity is provided through a broker, an equity placement fee will be necessary to create an accurate financial model.
How to Calculate Equity Placement Fees
Equity placement fees are calculated by multiplying a percentage by the amount of equity raised. For example, let us say that the equity placement fee is 2% and the equity requirement is $10,000,000.
Equity Placement Fee= 2% x $10,000,000= $200,000
Typically, the equity placement fee is included in the construction budget of a development model or a renovation budget in an acquisition.
At Top Shelf Models (TSM), the equity placement fee is included in the soft costs of the construction budget of a development model.
The picture above illustrates that in this case, the equity placement fee is 1% of the equity amount. The equity amount is $7,637,558 according to the LTC Debt Analysis box.
From Top Shelf Models
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