Can A Syndication Asset Manager Collect Asset Management Fees from TIC Owners?

NOTE: This article is the second in a 2-part series on 1031 Exchanges and Syndicates using the tenant in common ownership structure for acquisition of commercial real estate. This article describes how asset management fees can be allocated among TIC Owners. Click here to read Part 1, which describes how 1031 Exchangers can participate in a group investment alongside a Syndicate.

Can a syndication Asset Manager collect asset management fees from TIC owners?

Yes, the Internal Revenue Service (IRS) Revenue Procedure 2002-22 (Rev Proc 2002-22) indicates that the manager of a group investment that provides asset management services (i.e., an “Asset Manager”) for a property on behalf of multiple tenant in common owners can collect certain customary asset management fees proportionately from each of the TIC owners, as long as such fees are commensurate with market rates for such services. However, the Asset Manager may not earn compensation related to performance of the property (i.e., a profit split or “promote”). 

Each TIC owner should pay its proportionate share of asset management fees directly to the Asset Manager. If one of the TIC owners is a Syndicate, it should pay a pro-rated portion of the asset management fees (reduced by the percentage ownership attributed to other TIC owners) to its Asset Manager, because it is unfair for the Syndicate, which only owns a portion of the property, to pay 100% of the fees required for operation of the property. Allocation of fees amongst TIC owners should be described in an Asset Management Agreement between all of the TIC owners. 

A summary of customary fees earned by an Asset Manager that can be allocated among TIC owners (including the Syndicate) is provided below: 

  1. Loan Guarantor Fees and Refinance Fees – TIC owners guarantee their own portion of the loan so they would not participate in these fees; the amount paid to the Asset Manager should be reduced to reflect only the Syndicate’s portion of ownership.
  2. Asset Management Fee – Split among TIC owners according to percentage interests in the property.
  3. Disposition Fee – Split among TIC owners according to percentage interests in the property.
  4. Construction Oversight Fee – Split among TIC owners according to percentage interests in the property.
  5. Acquisition Fees – Split among TIC owners according to percentage interests in the property; however, the TIC owners should contribute cash for the acquisition fee as a “separate fee” in addition to the required cash investment for their exchange. If a TIC owner’s investment falls below their required investment amount, they may have to pay taxes on the deficiency. One way this is handled is for TIC owners to pay their proportionate share of the acquisition fee in cash to the 1031 accommodator (in addition to the boot that is being held by the accommodator), who shows it on the closing statement as a separate fee that gets disbursed to the Asset Manager at closing. Alternatively, the TIC owner could pay their share of the acquisition fee to the Asset Manager directly as a separate fee outside of the 1031 exchange. Exchangers should discuss the implications of acquisition fees with their accommodator and the Syndicator to ensure that they are handled correctly so the exchanger doesn’t get hit with an unexpected tax. 

Syndication Attorneys, PLLC can prepare Syndication Offering Materials as well as Tenant In Common and Asset Management Agreements. Please schedule an appointment at SyndicationAttorneys.com if you have questions.

print

Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!

Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!

About Syndication Attorneys

We are NOT your stereotypical law firm. We don’t believe in simply taking your money, handing you a stack of technical, often-incomprehensible legal documents and then bidding you good luck and good-bye. At Syndication Attorneys PLLC, we are committed to your success – not just with the project at hand, but your continuing success in business and investing. We are your long-term legal team.

More Resources

Should You Really Start a Fund?

We get potential clients who reach out to us every week who want to start a fund. While we could simply take their money and set them up with fund offering documents, we actually talk a lot of people out of doing a fund. Why? Because they don’t have the necessary...

How do I Create a Substantive Relationship?

Question: If I am doing a 506(b) offering, do I still need a pre-existing substantive relationship before I can solicit from an Accredited Investor (AI)?  If “yes,” is there still any waiting period after I get that Accredited Investor to sign a document attesting to...

What is Real Estate Syndication?

If you have a self-directed IRA or substantial investment funds, you probably have considered investing in real estate. But perhaps you have concluded that you lack the funds to invest on your own. Or maybe you simply don’t want to deal with the hassles of property...

Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!