The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
There are several types of real estate development fees, and what a developer may receive will depend on who their investors are, their roles in the project, and your negotiations. Generally, developers should always ask for developer fees as asking to run a project for 2 to 3 years with no fee type incentive is a very large ask on large scale commercial real estate projects. Typically, these fees will run around 1-2% of revenue, and one may receive more than one type of fee for the same project.
What are the different types of real estate development fees? You know, the different types of real estate development fees can vary depending on who your investor is, or the institutional, is it friends and family, is it high net worth individual, family office – those types of things. But, generally speaking, if you’re doing a development deal, you’re going to get a developer fee, or you really should because it’s really impossible to run a project for 2 to 3 years with no fees no way to cover your overhead. That’s a big ask if somebody is asking you to do that. So you better have a huge percentage of the upside if you’re not getting any fees at all. But, generally speaking, in a development deal you have a developer fee, and you may or may not have an asset management fee. And your developer fee can be 3% of either the hard cost or the total project cost depending on what you can negotiate, and 1% of the total project cost or the hard cost again depending on what you can negotiate. Now, once you own an asset, and you’ve built an asset that’s a stabilized asset, that’s totally leased out and cash flowing and maybe you’ve refinanced it, then you’re typically justified in paying yourself and receiving an annual asset management fee. And those can be anywhere from 1 to 2% of the revenue. So if you generate $1 million in annual rents, you can do the math on what those fees look like.
So, there’s asset management fees, those are typical, if you’re a developer and you’re getting a developer fee and a project management fee, you typically will not also get an acquisition fee, but you might. Depending on how good of a deal it is, and how motivated your investor is. That’s kind of a grey area. There’s nothing wrong with it, it’s just there’s not really clear guidance. Now if you are buying an existing asset – not developing something, which means you’re not going to get a developer fee, and you’re not going to get a project management fee, then typically it’s customary to get an acquisition fee, and an asset management fee, and then a disposition fee when you then sell the asset. So if you buy and build and lease and sell and hold and manage an asset, you could presumably get an acquisition fee, a developer fee, a project management fee, an asset management fee, a disposition fee – all the fees, I may have named some of them twice, but you could potentially get all of them. But the reality is that most people either do asset management, and get an acquisition fee and a disposition fee and an asset management fee, or they do development where they get management fee and a developer fee.