Entitlement/Development Consulting Fee
Hey guys, I have a friend who's family owns some land in Los Angeles that is not entitled but you can develop around 40 apartment units on the site per the zoning.
My background is in development so he asked if I can guide him to getting it entitled. So basically dealing with the city, architects, coming up with an appropriate land value to sell once it is entitled, etc. The land value I am coming up with right now is between $2-$3 million once they decide to sell it. He wants to pay me a monthly "consulting" fee for walking him through and helping him get everything approved. He has no background in real estate so I would basically be doing all of the work.
What would you say is an appropriate monthly fee to ask for going forward? No work has been done towards getting it entitled thus far. Looking forward to your guys thoughts.
Thanks!
You're asking us to determine what your time is worth to you. Estimate how many hours you expect to work, decide what your time is worth and back into a number. Most of the time the people are attorneys doing what you're describing so the logic tracks to determine that way.
I would suggest this is a flawed business concept based on the details presented.
What's the value proposition here?
You say the land might be worth between $2-$3MM...that's a pretty high variation in price from a percentage standpoint.
Zoning is the primary entitlement which drives the value of the land. You note the applicable zoning is already in place. But yet you also say the site doesn't have any entitlements.
If the strategy here is to obtain a site plan...that's something that primarily involves a civil engineer and not architect. And there's no much for you to do in terms of dealing with the city.
If the strategy here is to obtain actual building permits...aka the aspect that requires an architect...that isn't a wise strategy. Why? Having building permits in hand does little if anything to increase the value of the land.
Here's a larger question to contemplate: what happens when a prospective buyer doesn't like your site plan or blueprints and/or doesn't like your unit mix? That's a probable scenario...and it renders all of your efforts moot.
The monthly fee concept can also be problematic. What happens when a presumptive six month project turns into an eighteen month project?
Now...all of this might begin to make a little more sense if your friend intended to develop and own the asset himself.
Unless I'm missing something here...your friend's most prudent business strategy is to hire a qualified broker and sell his land now as is.
I'm happy to re-calibrate my response if I failed to properly understand the facts at hand.
If you agree with value-add story I would accept consider accepting sweat equity in lieu of a fee - say 10% of sale price.
I mean if we are trying to make you as much money as possible here...I would argue that a market developer fee is 5% of all project costs excluding land. You are proposing to do it through entitlements (and not through full construction, as a typical 5% fee is based on). Assuming that logic is correct, I think you could argue the entitlements in LA for this type of project (CEQA exempt) is worth 25% of the process. Total fee x 25% = your consulting fee.
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