Acquisition Fee

A program pays a fee to its sponsor specifically for locating, negotiating, and closing the purchase of a property after the offering has closed and funds are available. How does this acquisition fee differ from organizational and offering expenses?

1. A.They are the same category under a different name; both simply compensate the sponsor for work performed in connection with the programWrong. The two categories fund distinct activities occurring at different points in the program's timeline.
2. B.Acquisition fees are paid only out of ongoing operating cash flow after the assets are already generating income, unlike organizational and offering expensesWrong. Acquisition fees are typically paid from offering proceeds when a property is acquired, not from later operating cash flow.
3. C.Organizational and offering expenses are paid to the sponsor, while acquisition fees are paid only to unaffiliated third parties such as brokersWrong. This misattributes who receives each category; acquisition fees are commonly paid to the sponsor or an affiliate.
4. D.Organizational and offering expenses fund the formation and marketing of the offering itself, paid before or as capital is raised, while the acquisition fee compensates the sponsor for work finding and closing specific asset purchases after funds are availableCorrect. The two categories fund distinct activities at different points: forming and marketing the offering versus finding and closing specific asset purchases.

Why: Organizational and offering expenses fund the formation and marketing of the offering itself, while the acquisition fee is a distinct, later cost compensating the sponsor for finding and closing specific asset purchases once funds are available.

Talus Sponsor earns a front-end acquisition fee calculated as a percentage of the purchase price of each property the program buys, paid at the time of acquisition regardless of the price paid or the property's subsequent performance. An investor asks how this fee structure might affect the sponsor's incentives when negotiating a purchase price. What is the most significant concern?

1. A.The fee structure has no effect on negotiating incentives, since acquisition fees are standard industry practice.Wrong. Being standard practice does not eliminate the incentive a percentage-of-price fee creates to pay more for a property.
2. B.The fee structure only creates a concern if the property later underperforms.Wrong. The misaligned incentive exists at the moment of negotiation, regardless of how the property performs afterward.
3. C.The fee structure is automatically prohibited by FINRA regardless of how it is disclosed.Wrong. This type of fee is not automatically prohibited; it is a conflict of interest to be disclosed and evaluated, not a per se violation.
4. D.A percentage-of-purchase-price fee gives the sponsor an incentive to pay more for a property, running counter to negotiating the lowest reasonable price for investors.Correct. The sponsor earns a larger fee the higher the purchase price, directly misaligning its negotiating incentive with investors' interest in paying less.

Why: Because the fee is a percentage of the purchase price, the sponsor earns more compensation by paying a higher price for a given property, creating an incentive that runs directly counter to negotiating the lowest reasonable price on investors' behalf. This misalignment exists at the moment the acquisition decision is made, independent of how the property later performs -- a property purchased at an inflated price can still underperform for investors even while it generated a larger fee for the sponsor at closing. The concern is structural and immediate, not something that only matters if the deal later goes badly.

A program raises $12,000,000 in gross offering proceeds. Organizational and offering expenses consume $900,000. The sponsor separately receives a $360,000 acquisition fee for locating and closing on the program's properties. The program also sets aside a $240,000 working capital reserve. How much of the $12,000,000 is actually available for acquiring assets? (Figures are illustrative only.)

1. A.$11,100,000, subtracting only the organizational and offering expenses from the gross proceedsWrong. This subtracts only one of the three deductions, omitting the acquisition fee and the working capital reserve.
2. B.$10,860,000, subtracting the organizational and offering expenses and the working capital reserve, but not the acquisition feeWrong. This omits the $360,000 acquisition fee, which must also be subtracted.
3. C.$10,740,000, subtracting the organizational and offering expenses and the acquisition fee, but not the working capital reserveWrong. This omits the $240,000 working capital reserve, which must also be subtracted.
4. D.$10,500,000, subtracting all three deductions -- organizational and offering expenses, the acquisition fee, and the working capital reserve -- from the gross proceedsCorrect. $12,000,000 - $900,000 - $360,000 - $240,000 = $10,500,000 available for asset acquisition.

Why: All three deductions -- organizational and offering expenses, the acquisition fee, and the working capital reserve -- reduce the amount available for asset acquisition and must all be subtracted from gross offering proceeds.

Program Larkspur and Program Wren both raise $10,000,000 and report identical, relatively low organizational and offering expenses and working capital reserves. However, Larkspur pays its sponsor a substantially larger acquisition fee for locating and closing on its properties than Wren pays its own sponsor. An investor concludes the two programs must deliver equivalent asset exposure per dollar invested, since their headline organizational and offering expense figures are nearly identical. What is the flaw in that conclusion?

1. A.There is no flaw; organizational and offering expenses and the working capital reserve are the only figures that affect asset exposure per dollar investedWrong. Acquisition fees are a separate deduction that also affects how much capital ultimately reaches the assets.
2. B.The flaw is that acquisition fees are paid by the sponsor out of its own funds and never reduce the amount available to the program's investorsWrong. Acquisition fees are typically paid out of offering proceeds, reducing the amount available for the program's investors.
3. C.The flaw is that the two programs cannot be compared at all unless they raised the exact same total amount from investors, which they didWrong. The stem already states both programs raised the same total amount; that is not the source of the flaw in the investor's reasoning.
4. D.The flaw is that acquisition fees also reduce the amount of capital that ultimately reaches the underlying assets, so Larkspur's larger acquisition fee gives its investors less asset exposure per dollar despite the similar headline organizational and offering expensesCorrect. Acquisition fees are a separate deduction affecting asset exposure per dollar, independent of the organizational and offering expense figures.

Why: Acquisition fees are a separate deduction from organizational and offering expenses that also reduce the amount of capital reaching the underlying assets, so a program can look comparable on one measure while differing meaningfully on another.