Development Contract Terms
I am negotiating a contract with a developer for construction of an office building. I wanted to see if various experts on this forum can guide me with following terms. Are these market? What changes would you suggest?
Fee Schedule: Twenty-five percent (25%) of the total DEVELOPER Fee at construction loan closing, fifty percent (50%) of the total DEVELOPER Fee shall be distributed in equal monthly installments over the course of the construction of the Improvements with any and all remaining portions of the DEVELOPER Fee due at such time DEVELOPER secures the Substantial Completion for the Project.
Termination Fee: The Developer wants 25% of the contract as termination fee if the owner decides not to proceed after design documents have been submitted to the city.
Travel fees: Are travel fees to the site normally billable?
Any gotcha provisions to look out for or to include?
Fee schedule seems reasonable to me. I would even expect the developer to get a portion of the fee prior to construction to cover their G&A during the design/permitting period. Hard to comment on termination without knowing more--is the developer putting up any of the equity? 25% seems heavy--perhaps you get them to agree, for purposes of the termination calc, to straight line the total fee value over the anticipated development period and pay the actual cost to that point.
On the deals I have worked on, the developer fee is intended to cover personnel/G&A/overhead costs allocated to that project. Travel fees are typically a separate line item billed back to the deal as a project expense (similar to how an architect would bill you back for their travel expenses as a reimbursable).
Gotchas--better to ask your lawyer. Some deals allow for the fee to be based on total project costs excluding the fee and land basis. What if there is a construction delay--who picks up the tab during that period? Lock your project cost value for the fee calculation early--you should not be penalized for change orders, higher floating rate debt, etc. that raises the project cost basis.
Great answer. The developer is not putting up any equity.
Because we are paying for construction management fee as a percentage, we don't want to be approving small invoices for travel within 25 mile radius.
My attorney is looking at this as well. Good point about excluding the fees. The fee is based on hard costs only excluding land costs, professional fees, tenant allowance. Any solid definition of hard costs or substantial completion?
look at the contract with the GC. The hard costs should be defined by the contract GMP or Lump Sum amount (as stated in the AIA agreement). Substantial Completion is easiest to just tie to when the local jurisdiction issues a certificate of occupancy to the building, but a construction lawyer will have these term definitions readily available. The contractor should be tied to a delivery schedule in their contract with the developer, which you can usually mirror in a development agreement.
Not to go off topic but may I ask how you sourced the developer or did they bring the deal to you? If you went out to find the guy, did you issue some kind of RFP/RFQ to multiple developers? Just interested from someone who is on the developer end of the spectrum who is not that involved in capital sourcing..
Follow up question. How would you characterize HARD COSTS as the basis of development fee? Does building shell cost + site work cost + 10% contingency fee sound reasonable?
Travel expenses are typically considered reimbursable expenses; your budget will need to carry this line item and will cover travel, etc.. over the course of the project.
As noted above, pay attention to fee (is this calculated off total development cost, or total cost less land, or some other item?). If you have land control (i.e. the developer didn't bring the deal to you), you shouldn't pay him a fee based on land price. Cost overruns are a big deal; what is the cost split if you bust the budget? Typically, you'll want him to burn through his contingency first, and then ideally, some of his developer fee (though not all of it--just enough to offset the mistake and hold him accountable). Timing is big; what are your liquidated damages if the developer is late?
Recusandae deserunt quaerat ipsam molestias omnis et. Vero blanditiis et sint eaque et molestias. Sit id accusamus incidunt necessitatibus. Neque ipsa tempora quo. Et ea ratione impedit adipisci repellendus magni. Et molestiae quis eligendi qui itaque.
Dicta quos accusamus delectus dignissimos corporis dolores autem. Nihil deserunt perferendis magni vero expedita ducimus nihil. Distinctio ullam aperiam est qui. Possimus fugit et delectus iste distinctio laudantium. Tempore officia aspernatur ab rem quis. Libero dolor nostrum provident animi voluptatum. Magni est odio iste assumenda.
Non ad a vitae voluptatem ut explicabo est. Id dolorum fugiat vero. Mollitia itaque distinctio voluptatem doloribus fuga veniam.
Voluptatem omnis quisquam quidem vel. Inventore est consequatur sequi animi reiciendis molestiae repellendus. Labore magnam quia sunt omnis hic reiciendis.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...