Developer's fee
When is the developer's fee normally paid out? Is it at construction completion or paid out in installments throughout the construction process?
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From my experience with the deals I have worked on, typically the fee is paid evenly monthly. So if the fee is $2mil for example, and with a 20 month construction timeline, then $100k may be invoiced and paid monthly. But there are other structures that I’m sure could be negotiated if wanted. For example, you could defer the development fee to be paid at the end.
The technical answer is.... it's negotiable (between the developer, the equity, and to some extent the debt).
In theory, it is paid as development occurs, based on milestones or timelines or both. It is supposed to pay the salaries and expenses of the developer who is managing the project, so deferral to the end generally doesn't work.
It gets messy when performance hold backs and incentives are added or if the developer is contributing the fee (whole or part) to the deal in exchange for equity. But, in 'normal' situations, it is paid through the life of the project
Correct. Outside of any contribution as equity, the development fee is typically paid out in three ways: 1) straightlined over the development period 2) calculated as percent completion of the project 3) paid out something along the lines of 20% at financial close or draw one, then 70% straightlined (or percent complete) during the development period, and the last 10% paid out at CO or some demarcated point of completion.
I’m my opinion, it is more simple to calculate the fee on a straightline-basis as the dollar amount is easily determinable and allows for better cash flow forecasting for the developer (and LP, although immediate cash flow needs are probably more relevant to a development shop).
Cosign both of these.
We typically negotiate 20% up front to compensate for pursuit costs and then straight line up until CO.
This is how our firm structures the fee as well. 30% paid once construction commences. Equal installments thereafter until final CO.
This is the case for every single development deal we've ever done and is the industry norm
How does it work if the developer put's in all the equity and doesn't bring in outside sources? They do get debt though from say a bank.
They don't generate fees in this case, but they make money from leasing commissions if in house (think office with retail)/yearly income/then sale of the asset at some point correct?
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