DEFINITION of Acquisition Fee
A lessor charges an acquisition fee to cover the expenses they incur in arranging a lease. Acquisition fees may also refer to charges and commissions that one pays for the acquisition or purchase of property, such as closing costs, real estate commission, and development and/or construction fees. A buyer or lessor may pay acquisition fees upfront or add them to the loan amount (i.e., pay them over the term of the loan).
BREAKING DOWN Acquisition Fee
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.
It is preferable for a lessee to pay an acquisition fee upfront and separately, rather than including it in the loan or lease amount, since this can result in significantly higher interest expenses over the term of the loan.
Acquisition Fee and Real Estate Investing
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, fixing heating, plumbing, and other utilities, vetting potential lessees, and even dealing 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.