{"id":121533,"date":"2020-01-24T14:30:38","date_gmt":"2020-01-24T21:30:38","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=121533"},"modified":"2023-11-07T07:22:19","modified_gmt":"2023-11-07T14:22:19","slug":"real-estate-developer-fees","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/real-estate-developer-fees","title":{"rendered":"What Are Typical Real Estate Developer Fees?"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC3305783825&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n<p>Anyone who is <a href=\"https:\/\/www.biggerpockets.com\/blog\/2013\/05\/15\/commercial-real-estate-investing\/\" target=\"_blank\" rel=\"noopener noreferrer\">investing in a commercial real estate deal<\/a> should take the time to really understand how their money will be spent. This is a critical step in the <a href=\"https:\/\/www.biggerpockets.com\/blog\/due-diligence-ultimate-guide\/\" target=\"_blank\" rel=\"noopener noreferrer\">due diligence process<\/a> that many people overlook. Instead, they look at the total project costs without requesting a detailed breakdown of acquisition costs, hard costs, soft costs, and the developers\u2019 fees.<\/p>\n<p>The first three buckets are important to understand in their own right, but they\u2019re especially important given that most developers\u2019 fees are calculated as some percentage of the other three costs combined.<\/p>\n<p>In this article, we take a look at the different types of real estate developer fees, including the role of these fees and what you might expect them to cost.<\/p>\n<h2>Types of Development Fees<\/h2>\n<p>There are generally four types of development fees to be aware of when analyzing a commercial real estate investment opportunity:<\/p>\n<h3>Acquisition Fee<\/h3>\n<p>This is the fee that a commercial real estate developer charges for finding and facilitating the acquisition of the parcel slated for redevelopment. The industry standard tends to be about 1 percent of the purchase price. Most developers will insist on taking an acquisition fee, which is typically used to cover the compensation of the acquisitions team.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-114750 size-main-slider\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/08\/home-remodelling-702x336.jpg\" alt=\"New construction framing stick built house with frame\" width=\"702\" height=\"336\" title=\"\"><\/p>\n<h3>Development Fee<\/h3>\n<p>The development fee, also sometimes referred to as the \u201cconstruction management fee,\u201d is the fee a real estate developer takes to oversee the entirety of the development project, from pre-construction (e.g., the design and entitlement processes). This fee is generally used to cover corporate overhead and sometimes contributes to the developer\u2019s profit for the project.<\/p>\n<p>Some real estate developers outsource this project management capacity to a third-party firm that has no equity in the project. These fee-for-service development partners generally charge a flat monthly fee for their work.<\/p>\n<p><strong><em>Related: <\/em><\/strong><em><a href=\"https:\/\/www.biggerpockets.com\/blog\/how-to-evaluate-a-real-estate-developer\" target=\"_blank\" rel=\"noopener noreferrer\">5 Questions to Ask When Evaluating a Real Estate Developer<\/a><\/em><\/p>\n<p>Regardless of whether construction management is handled in-house by the developer or outsourced to a third-party provider, investors can reasonably expect to see development fees in the range of 3 to 5 percent of total project costs (<em>acquisition + hard + soft costs<\/em>).<\/p>\n<h3>General Contractor Fee<\/h3>\n<p>This is an additional fee, ranging from 3 to 4 percent of <em>hard costs only<\/em>, that is tacked on to the project by the general contractor. As a rule of thumb, if the real estate developer is ALSO serving as the general contractor, this fee should be at the lower end of that range, given that the developer is already taking its own fee. However, it is common for real estate developers (particularly on large projects) to outsource GC responsibilities.<\/p>\n<p>The GC fee covers costs such as bidding out construction documents to suppliers and subcontractors, negotiating subcontractor agreements, providing due diligence related to subcontractor selection, and any other costs incurred during the design phase. The GC fee is also the profit the general contractor expects to make during the construction phase for their role in overseeing the physical construction of the project.<\/p>\n<h2>Considerations When Evaluating Fees<\/h2>\n<p>When evaluating developer fees, there are a few important considerations to keep in mind.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-114850 size-main-slider\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2018\/02\/urban-redevelopment-main-702x336.jpg\" alt=\"cranes in downtown area being redeveloped\" width=\"702\" height=\"336\" title=\"\"><\/p>\n<p>First and foremost, you\u2019ll want to understand how many fees the developer is charging and whether these fees are in line with the industry averages as noted above. In a particularly complex project, for example, a large mixed-use development that requires new zoning and a lengthy political process, it might be reasonable to expect a higher development fee than a developer overseeing a smaller as-of-right project. The point here is to allow for some flexibility, within reason, depending on the nature of the deal.<\/p>\n<p><strong><em>Related: <\/em><\/strong><em><a href=\"https:\/\/www.biggerpockets.com\/blog\/2009-10-02-developing-real-estate-price-land-profit\" target=\"_blank\" rel=\"noopener noreferrer\">5 Easy Steps to Value Land for Development (&amp; Work in a Profit!)<\/a><\/em><\/p>\n<p>Next, consider whether there is a proper alignment of interests. Does the developer seem solely motivated by the fees, or do they truly care about the success of the project? One way to facilitate the alignment of interests is to prohibit the developers\u2019 fees from being used toward their equity in the deal. Instead, require the developer to leverage other funds to invest in the deal to ensure they have real \u201cskin\u201d in the game.<\/p>\n<p>Lastly, we recommend structuring the deal to control for when (exactly) a developer earns which fees. From an investor\u2019s perspective, you\u2019ll want to see as much of the fee back-loaded as possible, thereby keeping the developer motivated to complete the project as planned. A common structure is to release 25 percent of the developers\u2019 fees upon closing the deal, 50 percent paid pro rata with hard cost drawdowns, and 25 percent paid upon stabilization.<\/p>\n<h2>Conclusion<\/h2>\n<p>The real estate developer fees we\u2019ve outlined here today are certainly not exhaustive and do not even begin to take into consideration other developer costs\u2014such as \u201cpromotes\u201d secured as a result of project success. However, these are the most common fees that we typically see in commercial real estate deals, and as such, are important for investors to understand.<\/p>\n<p><a href=\"https:\/\/www.biggerpockets.com\/store\" target=\"_blank\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-114267\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/08\/5.2.jpg\" alt=\"ad-bookstore\" width=\"706\" height=\"125\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/08\/5.2.jpg 706w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/08\/5.2-300x53.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/08\/5.2-702x125.jpg 702w\" sizes=\"auto, (max-width: 706px) 100vw, 706px\" \/><\/a><\/p>\n<p><em>Questions about the above fees?&nbsp;<\/em><\/p>\n<p><strong>Ask in the comment section below!<\/strong><\/p>","protected":false},"excerpt":{"rendered":"<p>Anyone who is investing in a commercial real estate deal should take the time to really understand how their money will be spent. This is a critical step in the due diligence process that many people overlook. Instead, they look at the total project costs without requesting a detailed breakdown of all fees.<\/p>\n","protected":false},"author":502323,"featured_media":118161,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[2531,7119],"tags":[],"class_list":["post-121533","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-land","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/121533","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/502323"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=121533"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/121533\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/118161"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=121533"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=121533"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=121533"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}