Real Estate Developer Fee

PEREBS's picture
Rank: Monkey | banana points 54

Hey Guys,

Where do you see real estate developer fees at these days? I've been underwriting deals based on 4% of Hard Cost+Soft Cost.

Should there be an acquisition fee on top of this for the developer for "putting the deal together"?

Typical Development Fee

So what does the typical development look like? This user outlines how he asses fees on ongoing deals.
from certified user @DB73

From a lender's standpoint, I typically want to see Developer's Fees around 3% of total project costs (land, hard and soft), no more than 3.5%. Sometimes I see an acquisition fee, but not always. My scrutiny on fees increases when the developer is also acting as their own general contractor.

I want to see the proper alignment of interests between the developer, their equity partner and me (as lender) - that can get somewhat skewed when the developer is also the GC and is earning a development fee, GC fee, acquisition fee (and maybe even a construction management fee).

I have to ask myself, at the margin, does this developer care about the ultimate success of the project or is it just about the fees. Another good control to have in the deal is structuring when exactly the developer earns the fee. I want to see as much of the fee back loaded as possible (keeping the developer as focused on the final success of the deal), but the developer of course wants as much front loaded as possible.

In general I try to target 25% of the fee (or less) recognized at loan closing, 50% paid pro rata with hard cost draws, and 25% at certificate of occupancy (I try to push to stabilization if I can instead of C of O).


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Comments (25)

Mar 3, 2014

4% of Hard Costs & Managed Soft. Sometimes they (the Limited Partner) will hold 20-25% of the developer fee until development completion to incentivize the developer.

Most definitely there should be an acquisition fee, especially if the project was an off market transaction. Industry standard seems to be about 1% of the purchase price.

Mar 3, 2014

Good question. For developer fees, I'd say current market rate is ~5% of hard costs. I've seen portions disbursed at construction start, construction completion, and stabilization.

Regarding acquisition fees, it all depends on how much (perceived) LP competition there is for the deal. Agree that off-market status is a key driver in determining whether a capital partner will be willing to pay.

    • 1
Best Response
Mar 7, 2014

From a lender's standpoint, I typically want to see Developer's Fees around 3% of total project costs (land, hard and soft), no more than 3.5%. Sometimes I see an acquisition fee, but not always. My scrutiny on fees increases when the developer is also acting as their own general contractor. I want to see the proper alignment of interests between the developer, their equity partner and me (as lender) - that can get somewhat skewed when the developer is also the GC and is earning a development fee, GC fee, acquisition fee (and maybe even a construction management fee). I have to ask myself, at the margin, does this developer care about the ultimate success of the project or is it just about the fees. Another good control to have in the deal is structuring when exactly the developer earns the fee. I want to see as much of the fee back loaded as possible (keeping the developer as focused on the final success of the deal), but the developer of course wants as much front loaded as possible. In general I try to target 25% of the fee (or less) recognized at loan closing, 50% paid pro rata with hard cost draws, and 25% at certificate of occupancy (I try to push to stabilization if I can instead of C of O).

Way more than you asked, but hopefully that was helpful.

    • 2
Mar 8, 2014

Right on, right on.

I'd go even a step further--I've been with my particular bank for 6 months now. I've yet to see a developer fee financed by our debt; therefore, I've yet to see a developer fee on a budget from a developer that works with us. Since banks got burned so badly on development projects a few years ago, it would be a huge red flag for us to see a developer try to pocket a fee while getting 75-80% LTC or LTV with IO interest around 5% or less. Our bank (and our competitors) have gotten out of the business of taking on all the downside risk with limited upside.

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  • Anonymous Monkey
  •  Mar 8, 2014

Typically, the dev fee is 3-9% range + 50% of equity assuming you have the property (if in escrow) tied up and have paid for architectural and engineering and approval permits etc...
Depends on deal but typically deals my father and I do the above is very true, especially in the $50MM range.

Mar 8, 2014

On our Multifamily deals (typically in the $35-75MM range) we take a 3-4% developer fee based on total development cost of the project. We draw down on the fee as based on percentage completed. Typically we keep this fee 100% in house, however depending on debt guarantee and other deal points there could be splits or performance hold backs on the fee. Keep in mind that our equity is raised with friends and family and that more institutional type investors typically will propose a split of the fee.

Thanks.

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Mar 8, 2014

Thanks for the response, this is what I was looking for.

Mar 8, 2014

3-5% Fee of Total Project costs + Overhead is typical

Mar 8, 2014

4% of TPC is a good starting point but it's really as much as you can get away with.

Mar 8, 2014

^ found the developer....

Mar 8, 2014
thexaspect:

^ found the developer....

so true.
OP: " I would imagine most LPs would not be too pleased with a developer receiving revenue before the Pref. has been reached or am I mistaken on this?"
Sometimes the development fee is simply labeled "overhead." The developer is NOT really supposed to make serious money off the development fee. But I and others have seen that that is not always true.

Mar 8, 2014

It goes both ways.

I've had to cut the developer fee on projects to get a deal that works.

Most institutional partners will tell you what you're getting, around 4%.

Mar 8, 2014

Same here. We have begun using what my firm calls a "deferred developer fee", which is paid to the developer after the deal closes and therefore cannot be used as equity into the deal. However, they still get paid a fat check at the end.

Mar 8, 2014

I see a lot of deferred developer fees that have to repaid from cash flow. This is usually in deals with tax credits, where the developer fee was in basis and either was deferred to meet DSCR requirements or (usually) due to cost overruns - I do a lot of rehab/brownfield/revitalization work. In this case, you can't use it as equity because if a capital cost is not paid out over the term that the project is generating tax credits, then those credits will be recaptured and your investor will go apeshit.

Mar 8, 2014

Exactly right. We are doing multiple Historical Tax Credit and Brownfield Tax Credit deals. The DSCR requirement is the main reason for the Deferred Developer Fee in my experience.

Mar 8, 2014

Just confirming what everyone else has said. 3%, 4%, 5%, etc.

You want to get paid for your work, not just your investment.

Mar 8, 2014

For our LP investing, we like to see half of the dev fee deferred until sale. 1st half paid after the pref

Mar 8, 2014
CRE-Finance:

For our LP investing, we like to see half of the dev fee deferred until sale. 1st half paid after the pref

This is more along the lines of what I was thinking. I wasn't sure how the "upfront" fee would look in underwriting the deal with an institution. Someone also mentioned the developer fee not being used as equity which again I agree with.

My buddy is coming in right at 3.5% which is aligned with what everyone is saying, but the upfront fee was something I thought seemed a little ambitious. I see there are a number of ways of distributing the fee and obviously any developer will push to get all upfront.

Mar 8, 2014
TinMan1:

CRE-Finance:For our LP investing, we like to see half of the dev fee deferred until sale. 1st half paid after the pref

This is more along the lines of what I was thinking. I wasn't sure how the "upfront" fee would look in underwriting the deal with an institution. Someone also mentioned the developer fee not being used as equity which again I agree with.

My buddy is coming in right at 3.5% which is aligned with what everyone is saying, but the upfront fee was something I thought seemed a little ambitious. I see there are a number of ways of distributing the fee and obviously any developer will push to get all upfront.

To be clear, from my experience and every developer I know, there is a Developer Fee and a Overhead fee. These two combined run for about 3-6% of a deal. When we run deals, the overhead will usually be paid 25% at start with the remainder being paid as a project % complete or monthly. Overhead is a % of the 3-6%, or it can be T&M. The OH Fee pays for a developers employees / his time. No one that I know would wait to the end of a deal (2-4 years) before being paid this.

The Developer Fee is a the balance of the 3-6%. I see this negotiated multiple ways. Paid at milestones. Paid at end of deal. Often, this fee can be carry interest in the deal for the developer.

Mar 8, 2014

Developers make there $ of fees + promote, with fees covering mostly overhead costs / salaries. A list of fees (non inclusive) are as follows: acquisition fee, leasing override fee, construction management fee, development fee (note that this is independent of the construction management fee). All fees are usually warranted, that is if you are partnering with a developer who knows his shit and has an actual track record. But in all reality, developers will push to have the project burdened with as many fees as possible (within reason obviously).

With that said, the development fee that I typically see is 4.0% of hard & managed soft costs.

Mar 8, 2014

4% is a typical developer fee for a ~$50mm transaction. Some people include the land in the calculation, some dont.

The tax credit examples of deferred fees listed above is typically not applicable to developments that are not using tax credits as part of their capital stack (New market, historical, low income, etc..)

With respect to the comments to "half of the dev fee deferred until sale. 1st half paid after the pref" - Very few experienced/well capitalized developers would agree to this. I have worked for several development firms in various functions, none of which would ever have agreed to any terms this poor. If your an LP, this is one of the "best case" scenarios.

Mar 8, 2014

are these for deals in primary markets? I have never seen development fees that high. My firm runs projects in the $100-300M range and we are lucky to push anything above 2% fee on total project costs net of land. sounds like we need to amend our JV agreements....

Mar 8, 2014
Mar 8, 2014