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Development Fee

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A developer earns a fee to manage the development of a project.  This fee usually ranges somewhere between 3.5% - 5% of the project total cost (less the land cost) and is listed as a line item in the project development budget.

 

This development fee is in addition to what the developer would earn as his promoted interest in the deal.  The development fee is intended to cover the developer's staff and the overhead costs of conducting business.  The promoted interest is the developer's compensation for finding, assembling, and sponsoring the deal, and assuming the financial and legal risks to deliver the development.

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As an aside, some companies do provide third-party development management services for a fee to an external owner. However, most development companies craft their position as the sponsors and general partners of a development deal, and thus have their own in-house development managers.

 

Below are some of the responsibilities a developer undertakes to substantiate their development fee:

  • Searching for and selecting a site that meets the requirements of a rent-paying tenant

  • Creating or approving a site feasibility study

  • Reviewing zoning and platting of the site, and re-zoning or re-platting if necessary

  • Ordering and reviewing site specific environmental and geotechnical surveys 

  • Identifying the most suitable consultants, contractors, and vendors for the project and soliciting their competitive bids/pricing

  • Scheduling and attending a pre-development meeting with the city/municipality or authority having jurisdiction (AHJ)

  • Creating requests for proposals (RFPs) and overseeing the competitive bidding process

  • Producing, reviewing and refining a development budget

  • Generating a development schedule

  • Reviewing and negotiating every contract associated with the development deal (usually 10+ contracts)

  • Attending, reviewing, and providing feedback at design review meetings

  • Drafting and managing a responsibility matrix

  • Proposing and soliciting value engineering options to provide necessary materials/equipment/construction methods at the lowest cost with the least sacrifice of quality

  • Securing equity financing

  • Obtaining debt financing

  • Ensuring the timely receipt of city permits

  • Attending periodic (usually bi-weekly) Owner/Architect/Contractor (OAC) project meetings

  • Supervising and mediating interactions between different team members/companies

  • Evaluating and scrutinizing change orders

  • Reviewing the GC's pay application

  • Assembling and submitting draw requests to the bank

  • Producing and distributing quarterly or monthly investor reports to financial partners

  • Conducting regular project schedule reviews to ensure the project remains on track

  • Ensuring timely receipt of the certificate of occupancy

  • If licenses are required (typically for medical developments and senior living projects), ensuring conditions are set to pass the licensing inspection on the first try, and that this inspection task is on the completion schedule

  • Assessing property taxes to ensure they are fair and accurate, and attempting to reduce them if possible

  • Ensuring the punch list of the project is produced and all items on that list are resolved

  • Ensuring all project closeout documentation are collected and provided to the appropriate personnel 

  • Transitioning the project to the tenant, property manager, or operations team

  • Responding to, on average, 20+ emails daily regarding a specific project

 

 

Invoicing for Your Development Fee

The developer will typically invoice for the first 25% of his development fee at loan closing.  A development deal isn't a deal until the loan closes.  Loan closing often represents the first chance for a developer to recoup his high costs of the extensive pre-development activities he or she undertook to bring the deal to fruition.  A development company might have been burdened with staff and overhead expenses for a year or more as a project progressed through its pre-development stages. 

 

After the loan closes, the developer usually charges the next 65% of his fee throughout the construction phase, spread out monthly for the construction duration.  The remaining 10% of the fee is earned once the project reaches substantial or final completion.

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Next Page: Development Budget

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