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Commercial Real Estate FAQ With Stephen Epstein On Real Estate Development & Investments

How Do Real Estate Developers Charge Fees To Investors?

The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.

Real estate development or project management fees are the primary ways real estate developers get paid for their development projects. Somewhere around 3 to 5% of the total project cost or the hard cost is an industry standard, but there are some scenarios where these fees can change depending on your investment project. What you can negotiate with your investors is the most important factor in what fees may work for a particular development or investment project. 

How do real estate developers charge fees to investors? So the way that a real estate developer gets paid is typically through a real estate development fee and/or a project management fee. And industry standard for, sort of, larger deals, a deal let’s say bigger than $3 million and less than $50 million, sort of that average sized real estate development project, not institutional real estate deals but the types of deals and projects that we would be looking at here. The typical fee is somewhere between 3 to 5% of either the total project cost or 3% of the hard cost depending on whichever is less. And so that can change based on the product type or this or that, but generally speaking CA South charges about 3% standard developer fee on the total project cost including the land. And so on a $10 million project that’d be a $300,000 developer fee, and you figure that’s a two year deal, it takes 24 months to manage the project, you’re looking at $150,000 per year, you’ve got to pay pretty much your whole team and cover all of your overhead in order to be able to do that. Which is, if you’re just a one man band, that could sound pretty good, but if you have an actual organization it could be basically a break-even proposition. And so once in a while depending on the investor, they may or may not be willing to pay a project management fee as well, project management fee would be typically in the 1% range of hard costs or total project costs depending on what you can negotiate. 

But it’s really going to depend on how much your contractor is charging you for the construction management work. And so if construction management work is included in the general contractor’s bid, then the project management fee may not be justified, but if you as a developer are doing a lot of construction management and project management, then a fee would be definitely necessitated and justifiable. So, really all the fees, there are industry standards, but everything is really a function of what can you negotiate with your investors, how much work are you actually doing compared to the contractor, and how good of a project it is and how many other options you have. So, that’s my take on fees. 

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Richard Wilson