Development Fee Deferred as Equity
Hi Everyone,
I'm beginning my first mixed-use project as the General Partner (GP). I'm curious about how much of the development fee lenders typically allow to be deferred and counted as equity.
For example, if you have a $16 million project with 75% Loan-to-Cost (LTC) financing, you'd need $4 million in equity. If the development fee is $1 million, will a lender allow you to defer the entire development fee and count it as equity?
Can't imagine why not, unless there are legal or regulatory issues that prevent it (this does occur in LIHTC financing, for example).
Funny enough, I actually got the idea to defer my developer fee after reviewing underwriting for a LIHTC project. Everything thing just clicked in my head and gave me the confidence to sign a PSA.
Congratulations on getting a deal done!
I don't see why not either. I've had this same conversation on acquisition fees on existing deals where equity partners didn't want to accept deferred acquisition fees as a co-investment but if we were to collect the acquisition fee upfront and simultaneously invest an equal amount into the deal, they would count it as part of the co-invest.
I guess you can make a technical case that you don't have any "skin in the game" if you're just using your deferred fee as equity. There are plenty of ways to monetize a construction project so there is a risk that you don't project manage well and make your money elsewhere.
But that seems kind of ticky tack? I guess on the other end, if you're not taking a fee it means you may no be properly investing into staff and back office which may lead to problems down the line, but that also seems like a hurdle that an investment partner should clear before even agreeing to invest in a project. Who is giving money to someone they don't think can finish out construction?
If you defer an acquisition fee for equity do you need to pay taxes on it in that year?
Yes. Also if you’re getting 75% LTC run to the closing table.
And a 6.5% development fee on the entire capital stack lol.
It's a great deal! I met with the architect and engineers to confirm the costs, and I found that I had overestimated them in my proforma. A securities attorney and analyst reviewed my proforma as well and they both looked at me and said you need to get the PSA and close.
What could go wrong.
I had a conversation with a commercial lending broker today, and they indicated that they don't see any significant obstacles that would hinder funding for the project. The representative mentioned that while some lenders may have reservations about deals where the development fee is deferred as equity, overall, it shouldn't pose a problem.
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