Disposition is the sale or exit of a commercial real estate asset, the final stage of the investment life cycle after acquisition and asset management. It converts the value built during the hold into cash proceeds, and its timing and execution determine the realized return that the entire business plan was underwritten to achieve.
How Disposition Works
Disposition is the structured process of marketing, negotiating, and closing the sale of an owned property. A sponsor prepares an offering memorandum, engages a broker, solicits offers, negotiates a purchase and sale agreement, and closes after the buyer's due diligence. The realized value depends on the exit cap rate applied to stabilized net operating income at the moment of sale.
The proceeds a seller keeps are gross price minus the cost of sale. Brokerage commission is the largest line, ranging from about 3 to 6 percent of price and falling as deal size rises, with deals over 5,000,000 dollars often at 2 to 4 percent (Lornell Real Estate). Some sponsors also charge a disposition fee, commonly around 1 percent of sale price, and seller closing costs including commission typically run 4 to 8 percent of price.
Cost of sale component | Typical range |
Brokerage commission | 3 to 6 percent of price |
Sponsor disposition fee | About 1 percent of price |
Transfer taxes | Varies by jurisdiction |
Title, legal, and closing | Part of the 4 to 8 percent seller total |
Why Disposition Matters
Disposition matters because it is the moment the paper return becomes a realized one. A hold can perform well for years, but a mistimed or poorly executed sale caps the actual result. A move in the exit cap rate can shift the sale price by millions on a large asset, making disposition timing a consequential decision.
For an operator, disposition also determines net proceeds, which is what limited partners actually receive. Cost of sale is not a rounding error. On a 20,000,000 dollar sale, a 5 percent total cost of sale is 1,000,000 dollars that never reaches the waterfall. Underwriting the exit net of these frictions, rather than off the gross price, is what separates a defensible return projection from an optimistic one.
Example
Consider an industrial asset sold for 20,000,000 dollars. The sponsor pays a 4 percent brokerage commission, a 1 percent disposition fee, and roughly 1 percent in transfer taxes, title, and legal. The remaining loan balance at payoff is 11,000,000 dollars.
Line item | Value |
Gross sale price | 20,000,000 |
Brokerage commission (4 percent) | 800,000 |
Disposition fee (1 percent) | 200,000 |
Transfer tax, title, legal (1 percent) | 200,000 |
Total cost of sale | 1,200,000 |
Net sale proceeds before debt | 18,800,000 |
Loan payoff | 11,000,000 |
Net proceeds to equity | 7,800,000 |
Total cost of sale is 1,200,000 dollars, or 6 percent of the gross price. Subtracting it leaves 18,800,000 dollars, and after the 11,000,000 dollar loan payoff, equity receives 7,800,000 dollars. The 1,200,000 dollar friction is the difference between underwriting off gross price and modeling the exit the way it actually settles at the closing table.
Variations and Edge Cases
Disposition is not always a straight sale. A 1031 exchange defers capital gains tax by rolling proceeds into a like-kind replacement property, changing how and when the seller realizes cash. A sale-leaseback keeps the seller in place as a tenant.
A recapitalization or partial-interest sale can return capital without a full exit, and a portfolio sale may price differently than the sum of the individual assets sold one by one.
Disposition vs Acquisition
Disposition is often paired with acquisition because they bookend the investment life cycle, but they are opposite transactions. Disposition is the sale of an owned asset to realize return and return capital to investors. Acquisition is the purchase of an asset to begin a business plan, deploying capital rather than returning it.
Dimension | Disposition | Acquisition |
Direction | Selling an owned asset | Buying an asset |
Cash flow | Returns capital to investors | Deploys capital |
Life-cycle stage | End of the hold | Start of the hold |
Key pricing input | Exit cap rate | Going-in cap rate |
Frequently Asked Questions
What does disposition mean in commercial real estate?
Disposition is the sale or exit of a commercial real estate asset, the final stage of the investment life cycle. It converts the value built during ownership into cash proceeds and, through its timing and execution, determines the realized return the business plan was underwritten to achieve.
What are typical seller closing costs on a disposition?
Seller closing costs on a disposition, including brokerage commission, typically run 4 to 8 percent of the sale price. Commission alone ranges from about 3 to 6 percent and falls as deal size rises, and some sponsors add a disposition fee of roughly 1 percent of price.
What is a disposition fee?
A disposition fee, sometimes called an exit fee, is a charge some sponsors collect upon the sale of an asset, most commonly around 1 percent of the sale price. Not every sponsor charges one, and when charged it is usually equal to or lower than the acquisition fee.
Related Terms
Hold Period
Exit Cap Rate
Purchase and Sale Agreement
Net Operating Income
Offering Memorandum