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Commercial Real Estate Money Reveal
Few people know just how much money flows through our ecosystem. Time to change that.
Follow me behind the scenes of a $10M apartment sale.
You won’t believe the number of parties involved or how much they earn.
Take the red pill
Few people know just how much money flows through our ecosystem. Time to change that.
Follow me behind the scenes of a $10M apartment sale.
You won’t believe the number of parties involved or how much they earn.
Take the red pill
1) Listing brokers represent the seller and market the property to find a buyer.
Compensation is ~2% of sales price, with a bonus for exceeding the target sales price.
They can also represent the buyer to earn even more.
Comp: $200 - 250k
Compensation is ~2% of sales price, with a bonus for exceeding the target sales price.
They can also represent the buyer to earn even more.
Comp: $200 - 250k
2) Buyer's agents are less common in commercial deals because
the buyers are more sophisticated
unlike the residential world, commercial brokers tend not to share fees
They can make 0.5 - 2%
Comp: $50 - 200k
the buyers are more sophisticated unlike the residential world, commercial brokers tend not to share feesThey can make 0.5 - 2%
Comp: $50 - 200k
3) Quick disclaimer
some roles are not present in every transaction
compensation numbers are approximate
everything is negotiable
some roles are not present in every transaction compensation numbers are approximate everything is negotiable
4) Loan brokers find the best financing options and negotiate with the lender.
They split an origination fee, ~1% of the loan, with the lender. Some also get paid on the back end when the loan is sold.
On a $10M deal, the loan would be ~$7.5M.
Comp: $37.5 - $75k
They split an origination fee, ~1% of the loan, with the lender. Some also get paid on the back end when the loan is sold.
On a $10M deal, the loan would be ~$7.5M.
Comp: $37.5 - $75k
5) The lender profits in three ways from the loan.
The first way is the origination fee mentioned above. When a loan broker brings in the business, this fee is shared.
Comp: $37.5 - $75k
The first way is the origination fee mentioned above. When a loan broker brings in the business, this fee is shared.
Comp: $37.5 - $75k
6) The second way the lender profits is by becoming the loan servicer. In exchange for
collecting mortgage payments
enforcing borrower compliance
forwarding funds to the mortgage holder
The servicer receives ~0.25% of the loan each year.
Comp: $19k/yr on a $7.5M loan
collecting mortgage payments enforcing borrower compliance forwarding funds to the mortgage holderThe servicer receives ~0.25% of the loan each year.
Comp: $19k/yr on a $7.5M loan
7) Finally, the lender profits from the yield spread premium.
The yield spread is a portion of the mortgage interest rate which is pure profit to the lender.
When the loan is sold, a 0.3% yield spread is worth ~2% of the loan.
Comp: $150k on a $7.5M loan
The yield spread is a portion of the mortgage interest rate which is pure profit to the lender.
When the loan is sold, a 0.3% yield spread is worth ~2% of the loan.
Comp: $150k on a $7.5M loan
8) The lender's attorney
prepares the loan documents
makes sure the i's are dotted and t's crossed
vets and performs due diligence on the buyer
The lender tends to have a volume agreement with the law firm. The buyer pays the fees.
Comp: $15 - 25k
prepares the loan documents makes sure the i's are dotted and t's crossed vets and performs due diligence on the buyerThe lender tends to have a volume agreement with the law firm. The buyer pays the fees.
Comp: $15 - 25k
9) The buyer and seller each have real estate attorneys who
help resolve title objections
assist through the closing process
negotiate the purchase agreement
review and prepare closing documents
help resolve title objections assist through the closing process negotiate the purchase agreement review and prepare closing documents
10) One side drafts the purchase agreement, giving them an anchoring advantage in negotiation.
Frequently, one of the attorneys acts as title & escrow. They do the legal work for free because the title company’s commission is more than the legal bill.
Comp: $15 - 50k each
Frequently, one of the attorneys acts as title & escrow. They do the legal work for free because the title company’s commission is more than the legal bill.
Comp: $15 - 50k each
11) A securities attorney helps the buyer raise money from investors in an SEC compliant manner. They
file regulatory documents
prepare legal operating agreements
draft a private placement memorandum
structure and create the buyer's legal entities
Comp: $15 - 75k
file regulatory documents prepare legal operating agreements draft a private placement memorandum structure and create the buyer's legal entitiesComp: $15 - 75k
12) The lawyers have left the room!
Time for a quick stretching break.
Lots more when we come back.
Time for a quick stretching break.
Lots more when we come back.
13) Most state and local governments tax real estate transactions by charging transfer taxes and recording fees.
These range from 0 - 1% of the purchase price.
Comp: $0 - 100k
These range from 0 - 1% of the purchase price.
Comp: $0 - 100k
14) The escrow agent is a neutral party who
holds buyer funds
collects transaction-related bills
disburses payments to all parties
consummates the transaction and records the documents
They often also perform title and earn the title commission.
Comp: $1 - 2k
holds buyer funds collects transaction-related bills disburses payments to all parties consummates the transaction and records the documentsThey often also perform title and earn the title commission.
Comp: $1 - 2k
15) The title company issues an insurance policy to indemnify the buyer and the lender in the case of title defects.
Rates are regulated by the states, but ~0.3% of purchase price is typical.
Comp: ~$30k
Rates are regulated by the states, but ~0.3% of purchase price is typical.
Comp: ~$30k
16) The title agent, who is commonly escrow or one of the attorneys, binds the title policy.
Since title companies have notoriously low claims rates, they pay large commissions to the agent, as much as 70-85%.
Comp: $21 - 25k
Since title companies have notoriously low claims rates, they pay large commissions to the agent, as much as 70-85%.
Comp: $21 - 25k
17) The appraiser independently values the property to
protect the lender from over-lending
protect the buyer from overpaying
Comp: $5k
On deals that actually close, the appraisal tends to be a bit higher than the purchase price.
https://twitter.com/evanmr/status/1347287947708571656?s=20
protect the lender from over-lending protect the buyer from overpayingComp: $5k
On deals that actually close, the appraisal tends to be a bit higher than the purchase price.
https://twitter.com/evanmr/status/1347287947708571656?s=20
18) Building engineers inspect the property as part of a "PCA report" which is used to identify
safety hazards for immediate repair
deferred maintenance to be repaired
ongoing maintenance needs of building over the ownership period
Comp: $5k
safety hazards for immediate repair deferred maintenance to be repaired ongoing maintenance needs of building over the ownership periodComp: $5k
19) Environmental inspectors perform a "Phase I" to identify any environmental concerns.
Comp: $5k
Comp: $5k
20) Surveyors map out the legal property lines along with
property improvements
flood zones
city streets
easements
Their work is necessary in order to get title insurance and protects against encroachments and adverse possession claims.
Comp: $3 - 5k
property improvements flood zones city streets easementsTheir work is necessary in order to get title insurance and protects against encroachments and adverse possession claims.
Comp: $3 - 5k
21) The insurance company protects the buyer and lender against excess loss from property damage and legal liability.
They receive a full year of premium at closing.
The cost to insure habitational property has been rising rapidly. Current market is ~$500/unit/yr.
Comp: $50k
They receive a full year of premium at closing.
The cost to insure habitational property has been rising rapidly. Current market is ~$500/unit/yr.
Comp: $50k
22) Insurance agents help the buyer locate the best policy options and bind coverage
They typically get ~15% commission on a commercial policy
Comp: $7.5k
They typically get ~15% commission on a commercial policy
Comp: $7.5k
23) Cost segregation engineers catalog the different components of the building and their useful life. Their report helps the buyer be more tax efficient.
Comp: $5k
Comp: $5k
24) One final break to let off some steam. Trust me, you'll need it.
Despite everyone's best intentions, there will come a point (or many) in the contract period where you need a punching bag.
Despite everyone's best intentions, there will come a point (or many) in the contract period where you need a punching bag.
25) The seller's lender gets a fee when the seller's loan is paid off early, especially the money will be re-lent at a lower interest rate.
Fees are based on unpaid principal balance and can be
fixed (1 - 5%)
yield maintenance (complex formula, 10%+)
Comp: $100 - $200k
Fees are based on unpaid principal balance and can be
fixed (1 - 5%) yield maintenance (complex formula, 10%+)Comp: $100 - $200k
26) Property management companies are key to a smooth closing. The seller's manager helps
respond to many requests
prepare due diligence materials
coordinate tours and inspections
keep the property running smoothly
Many companies charge $3 - 5k for this extra burden
respond to many requests prepare due diligence materials coordinate tours and inspections keep the property running smoothlyMany companies charge $3 - 5k for this extra burden
27) The buyer's property manager helps
perform due diligence
prepare a property budget
develop a strategy for operations
line up contractors for capital improvements
Many companies charge a $3 - 5k onboarding fee to cover these services.
perform due diligence prepare a property budget develop a strategy for operations line up contractors for capital improvementsMany companies charge a $3 - 5k onboarding fee to cover these services.
28) Trade contractors help perform physical due diligence, identifying unknown issues and scoping out improvements. Specialists are commonly called to focus is on
the roof
the foundations
inspecting for termites
scoping the sewer lines
Comp: $5 - 15k total
the roof the foundations inspecting for termites scoping the sewer linesComp: $5 - 15k total
29) The sponsor of the buyer side typically earns a 1% acquisition fee on purchase.
Likewise, the sponsor of the seller side may earn a 1% disposition fee on sale.
Comp: $100k each
Likewise, the sponsor of the seller side may earn a 1% disposition fee on sale.
Comp: $100k each
30) If the project was a success, the sponsor of the seller side will earn their carry.
This is commonly 30% of profits, after investors receive all of their initial investment back.
Depending on how long the project was held, this could be $500k - $1.5M.
This is commonly 30% of profits, after investors receive all of their initial investment back.
Depending on how long the project was held, this could be $500k - $1.5M.
31) I'm zapped, time to call for reinforcements. Some great ReTwit follows are
@moseskagan
@fortworthchris
@sweatystartup
@Keith_Wasserman
@ChrisJBakke
@bobbyfijan
@MattLasky
@MarcSGIlbert
@TheRealEstateG6
@laughridge
@jayvasdigital
Friends, what roles did I miss?
@moseskagan
@fortworthchris
@sweatystartup
@Keith_Wasserman
@ChrisJBakke
@bobbyfijan
@MattLasky
@MarcSGIlbert
@TheRealEstateG6
@laughridge
@jayvasdigital
Friends, what roles did I miss?
32) You've now met the cast of supporting players and seen the sums of money involved.
We've barely scratched the surface of each role, but I hope you've begun to sense opportunities to improve and innovate.
Are you going down this path? Keep me posted.
We've barely scratched the surface of each role, but I hope you've begun to sense opportunities to improve and innovate.
Are you going down this path? Keep me posted.
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