What Is an Acquisition Fee?
An acquisition fee, sometimes built into a price of a lease or loan, is charged by a lessor to cover the expenses, usually of the administrative variety, that they incur in establishing said lease or loan. Acquisition fees may also refer to charges and commissions paid for the acquisition or purchase of real property.
A loan acquisition fee should not be confused with an acquisition cost or the total cost that a company recognizes on its books for property or equipment after adjusting for discounts, incentives, and other necessary expenditures, but before sales taxes.
- An acquisition fee is charged to cover the administrative and overhead expenses incurred in creating a lease or loan.
- Lessees and borrowers can pay the fees upfront or add them to the ongoing payments of the lease or loan, though the former method is often more beneficial to the borrower.
- Portfolio managers, specifically those that manage real estate funds, may also assess acquisition fees.
Understanding Acquisition Fees
An acquisition fee is a charge from a lender or lessor to cover the expenses incurred for arranging a loan or lease agreement. Common examples include closing costs, real estate commissions, and development and/or construction fees. A buyer, or lessor, may pay acquisition fees upfront or add them to the loan or lease amount (i.e., pay them over the term of the loan).
At times, acquisition fees may be hidden in the purchase or lease price, which can add significantly to the acquisition price for the unsuspecting buyer or lessee. The buyer or lessee should, therefore, insist on a clear explanation and breakdown of the acquisition fee.
A borrower should typically pay any acquisition fee owed upfront and separately rather than including it in the loan amount since this can result in significantly higher interest expenses over the term of the loan.
Acquisition Fees in Real Estate Investments
Investing in real estate often requires a distinct approach to investing in other asset classes. Real estate is defined as property, including the land and the buildings on it, as well as the land's natural resources (e.g., uncultivated flora and fauna, farmed crops and livestock, water, and mineral deposits). Residential real estate includes undeveloped land, houses, and condominiums; commercial real estate consists of office buildings, warehouses, and retail store buildings; and industrial real estate can be factories, mines, and farms.
What makes investing in a rental property more challenging than many other investments is the amount of time and work the investor must devote to its maintenance. If you purchase a publicly traded stock, it usually sits in your brokerage account and increases in value; however, if you invest in a rental property, the position of being a landlord entails rent collection as well as repairs, heating, plumbing, and other utilities. Landlords also will pay for vetting potential lessees and even for having to deal with lawsuits at times if lessees break their leases. For this reason, many investors shy away from direct investments in real estate.
For their work managing real estate funds, portfolio managers often receive certain acquisition fees. These correspond with the fund's inception, often along with other financing, deal, offer, and organizational costs. When managing a real estate fund, in contrast with other types of funds that invest in less tangible securities, several operational fees arise in creating real estate funds, such as leasing, property management, construction management, and disposition when the fund dissolves.