When evaluating potential real estate investments, especially in the syndication space, you’ll often see sponsors advertising seemingly sky-high returns. Whether these returns are associated with upcoming projects or part of the sponsor’s track record, they’re designed to catch your eye. But before you let those numbers convince you, there’s one critical question every investor should ask:
Are these returns net of sponsor fees, or are they project-level returns?
This is a big question that many real estate sponsors don’t want you to ask.
What Are Project-Level Returns?
Project-level returns in a real estate investment reflect the overall performance of the investment at the property or project level. These metrics measure the returns generated by the investment itself before any sponsor-related fees or splits are applied.
For example, let’s say a property generates an 18% annual return. That might look great on paper, but if this is a project-level return, it doesn’t tell you what you, the investor, will actually take home after fees. Depending on the fee and split structure of the subscription agreement, those returns could end up looking closer to 9-10%, which isn’t quite as jaw-dropping.
Project-level returns are useful for understanding the overall strength of the investment from an analysis perspective, but they don’t give a full picture of your net benefit as a limited partner.
What Does It Mean When Returns Are Net of Fees?
Returns that are net of fees represent the actual returns you, as an investor, can expect after sponsor fees, profit splits, and other costs have been deducted. These are the numbers that matter most to a passive investor because they directly impact your bottom line.
Here’s how it works:
- Sponsors typically charge fees such as acquisition fees, asset management fees, and disposition fees.
- After these fees are deducted, along with any profit split arrangement, the remaining returns are distributed to investors.
- If a sponsor advertises returns as “net of fees,” it means they’ve already accounted for these deductions in their metrics.
For instance, if a sponsor projects an 18% annualized return net of fees, you can be more confident that this reflects your share of the profits, not just the project’s performance.
Why It Matters
Understanding whether returns are net of fees or project-level can help you avoid unpleasant surprises. It’s easy to get drawn in by impressive-sounding numbers, but those metrics might not accurately reflect your actual returns as a passive investor.
When reviewing an investment opportunity:
- Ask the sponsor to clarify: Are the advertised returns net of all fees?
- Does their marketed track record show net or project-level returns?
- Review the fee structure of every deal: Understand the types of fees involved and how they impact your returns.
- Compare net returns across opportunities: This helps you make an apples-to-apples comparison of different deals.
Redwood Capital Always Markets Returns Net of Fees
While it’s exciting to see sponsors marketing strong returns, experienced investors know to dig deeper. Don’t just take advertised metrics at face value—ask the right questions, and focus on what truly matters: your net returns. By understanding whether those returns are net of fees or at the project level, you’ll be better equipped to evaluate opportunities and make more informed investment decisions.
Stay diligent, and remember: not all advertised returns are created equal.
At Redwood Capital, we pride ourselves on our transparency and integrity. All of our marketed returns are net of fees, which means that they are the returns we expect to deliver to passive investors.
