Updated · Part of the CRE investment glossary
How a disposition fee works
Selling a property is work: choosing the timing, hiring and managing a broker, preparing due diligence, negotiating with buyers and closing. The disposition fee pays the sponsor for it. It is the last of the sponsor’s fees on a deal, after the acquisition fee at closing and the asset management fee during the hold, and it is separate from the promote.
Because the fee is charged on the sale price but paid out of the equity’s share of proceeds, leverage magnifies it. After the loan is repaid, a fee of 1% of the price can be several percent of what is left for investors.
The formula
Follow the sale proceeds from the price down to the waterfall:
Disposition fee = rate × sale price Proceeds to the waterfall = sale price − selling costs − loan payoff − disposition fee
- Rate: the percentage in the operating agreement. Rates vary by sponsor and deal; there is no standard.
- Selling costs: the broker’s commission, transfer taxes, legal and closing costs.
- Loan payoff: the outstanding balance plus any prepayment penalty or defeasance cost.
Worked example: where the fee comes from
A property sells for $26,000,000. Selling costs are 2% ($520,000) and the loan payoff is $13,000,000, leaving $12,480,000 before the sponsor’s fee. The illustrative disposition fee is 1% of the price: $260,000. The waterfall then divides $12,220,000 between investors and the sponsor.
The fee is 1% of the price but $260,000 ÷ $12,480,000 = 2.1% of the equity’s proceeds. If investors put in $8,000,000 and nothing else had been returned, it would also be $260,000 ÷ $4,480,000 = 5.8% of the profit on the sale.
| Line | Arithmetic | Amount |
|---|---|---|
| Sale price | $26,000,000 | |
| Selling costs | 2% × $26,000,000 | −$520,000 |
| Loan payoff | −$13,000,000 | |
| Proceeds before the fee | $26,000,000 − $520,000 − $13,000,000 | $12,480,000 |
| Disposition fee | 1% × $26,000,000 | −$260,000 |
| Proceeds to the waterfall | $12,480,000 − $260,000 | $12,220,000 |
Subordination: when the fee waits
Some agreements pay the disposition fee only after investors have received their capital back, or their capital and pref. Take the same deal selling for $21,500,000: after 2% selling costs ($430,000) and the $13,000,000 payoff, $8,070,000 is left. A 1% fee would be $215,000, but if it is subordinated to the investors’ $8,000,000 of capital, only $70,000 is available to pay it. The agreement says whether the rest accrues, is paid later or is forfeited.
Subordination ties the fee to results in the same way the promote is tied to them, which is why investors ask about it.
Disposition fee vs broker’s commission
The two are paid for different things and to different people:
- The broker’s commission goes to the listing broker who markets the property and is a selling cost.
- The disposition fee goes to the sponsor for managing the sale.
- If a sponsor affiliate is the broker, ask whether the deal pays both, and whether one is credited against the other.
- A refinance is not a disposition. Agreements that pay a fee on a refinance usually call it a refinance fee.
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.