Exploring the Spectrum of Real Estate Development Management Fees
In the complex landscape of real estate development, various management fees emerge as distinct cost items, each serving a unique purpose in the lifecycle of a project. From development and construction to asset management and beyond,
understanding these different fee types is essential for both investors and developers. This comprehensive exploration delves into the spectrum of real estate development management fees, shedding light on their roles, processes, and variations.
This post is complementary to other post Real Estate Development Processes. We have broken down the management into different category and provided more details on cost as well.
Summary
| Management | Purpose | Timeline | Fee |
| Acquisition Management | Strategizing & acquiring one or more adjacent properties | Initial concept to the completion of the property transfer | 3% to 4% of the land purchase price |
| Development Management | Securing development permit while preserving project viability | Property transfer completion to receving of development permit | 3% to 8% of the total project cost |
| Construction Management | Managing trades and constructing the project | Starts when the development permit is obtained and ends when the occupancy permit is received | 2% to 5% of the total construction cost, depending on project size and complexity |
| Financing Management | Arranging required land loan and construction loan | Both when the land is purchased (land loan) and when the construction is starting | 0.5% and 2% of the total financing amount |
| Sales & Marketing Management | Unit-mix design, marketing, and selling the building or individual strata units | Starts when the Develpoment Permit is obtained and ends when the sale is completed | 1% to 5% of the total sales revenue |
| Asset Management | Maintaining the building | Starts when the construction is complete and ends when the building is sold | 1% to 10% of the property's gross annual income, depending on the project size |
Acquisition Management Fee
Any real estate development project starts by acquiring one or more properties. The process of coming up with a financial strategy and executing the strategy to purchase the properties is called acquisition management.
The purpose of acquisition management is to design and execute a strategy to purchase one or more adjacent properties. This means to identify, evaluate, negotiate, and secure properties or land that align with the project's goals
Process
Acquisition management spans a wide range of tasks. Performing these tasks require a fair amount of expertise, market insight, and of course time.
Here is a list of tasks an acquisition manager has to do:
Investment Type and Scope:
Determining the investment type and scope depends largly on the experience, expertise, and risk appetie of the ownership group or perosn. Some groups are heavily concentrated on one type of investment, such as office buildings, multi-family buildings, or industrial buildings. And, some groups diversify depending on the location, migration numbers, crime rate, etc.
The scope depends on the budget and the business relationship with lenders. A seasoned developer who has worked with a lender and a team of investors for a long time is often able to receive higher loan to value or loan to cost. Higher LTV often means bigger project volume.
Hiring a real estate agent:
Given the local nature of real estate investment, purchasing a good property shields you from market risks. Your real estate has fiduciary duty to you and complies with your acquisition instructions. An experienced agent who is ready to search every
corner of the market and have done similar work in the past is worth every penny of the commission. Finding the right investment asset, negotiating wisely, and closing the deal confidently are critical skills that can set your project for success.
In addition to hiring the real estate agent, the acquisition manager has to do thorough market research to identify the neighborhood, product types, and price points for each product type in order to give clear directions and instructions to the agent.
Pro-Forma & Offer:
In its core, a viable real estate project is built on a solid pro-forma. The acquisition manager should run a pro-forma to know what price they should offer for the property. The pro-forma should include costs such as hard-cost, soft-cost, financing, and land. It also has to cover all revenue items such as rental revenue from parkings and storages as well as the rental or sale revenue from
units. A successful acquisition considers different scenarios for a project. The software product you use in this phase is critical. Ideally, you'd want to run multiple pro-formas, allow someone in your firm to go over it and approve it, and let investors, architect, or other outside consultant
to comment on the relevant parts of it as well. Also, the more options you have, the better negotiating position you'd have during the acquisition. So, you'd need to run multiple pro-formas on multiple development sites and be able to collaborate and compare. ROI and project IRR are used as key performance indicators (KPIs) in this step.
Our product offers different tiers which allow you to do just
that. While the free version allows you to create a pro-forma effortlessly, the paid versions allow collaboration, commenting, and comparison.
Other Due Diligence:
After an offer is put on the property, one major acquisition task is to ensure that the land is clean. If the site is not clean, the cost of clean up should be born by the seller. In some jurisdictions, the seller is responsible to clean the site by law.
Municipalities often require that a certificate of compliance from a government agency in charge of environmental cleanup be issued as part of the documents for the redevelopment application on that site. So, the acquisition manager is responsible to ensure
that the site is either clean or there are provisions in the contract requiring the seller to provide the required certificate. If the seller refuses to take responsibility for obtaining the clearance and
insists in the contract that the purchaser is responsible for any cleaning cost, the offer price should reflect the cleaning cost by getting quotes from reputable environmental companies. Given the risky and lengthy nature
of environmental cleaning process, it is wise to build enough coushin in the offer price in case additional cleaning cost or time is required. Once these naunces are ironed out, the final pro-forma should be prepared and sent to the
lenders to get their term sheet before removing the subjects.
The acquisition manager should also make sure that the title is free and clear of charges, liens, etc. The acquisition manager does that by sending a copy of the title to the lawyer and ask for their input and comments.
Another task at this stage is to create the legal entity that is supposed to act as the legal owner of the property and the project. The owner should consult with their lawyer to create the entity. Typically, a limited partnership is created for this purpose.
For more details on this legal entity, please visit our blog posts:
It is critical to note that this legal entity has to be named as the purchaser in the contract of purchase and sale to avoid additional transfer tax from one legal entity controlled by the owners to another legal entity. Consult with your legal council on this and other contract issues prior to the first draft of the agreement, and make sure you let the land owner(s) know of this early on in the negotiation process.
Fees
The acquisition management fee depends largely on the project scope and complexity, local government regulations, type of property, acquisition duration, etc. Also, note that the acquisition management is not the same as the acqusition costs such as
property transfer tax, legal fees, etc. But, given that real estate fees are about 2%-2.5% of the land purchase price, the acquisition fee could range between 1%-3% of the purchase price plus the real estate commission.
After the site is purchased and the acquisition is concluded, the acquisition management job is completed and the acqusition manager passed the baton to the development management.
Development Management Fee
The development management fee is the compensation the management team receives to come up with a profitable design and obtain the permission from the municipality for the proposed building with a specific design, density, height, and use conforming to the municipality's bylaws and regulations.
In some jurisdiction, as long as the application conforms with the existing use, density, height, and some other key requirement, no develpment permit is required. For instance, if the existing use of the building is a single-family detached dwelling and the application is made for the same, the development permit
is not required. This means there will be no development management fee as well. For major commercial developments or renovations requiring the change in use or density, the development permit is typically required.
The development management tasks may be performed in-house by hiring a development manager or sourcing out to firms specializing in the field. Much like an orchestra conductor, a development manager is in charge of putting a team together, charting the course ahead, harmonizing performances, and ensuring the timely execution at each step of the way. But, that's not all. The development manager has to also coordinate
with the owner, investors, municipality, and neighborhood association to ensure all the stakeholders are on board with the plan, that the project is still viable, and the development time is not extended unreasonably. To read more about the development management process, please see our blog post REAL ESTATE DEVELOPMENT PROCESS
Process:
If the development manager takes on the project from the acquisition manager, the processes starts after the purchase is completed. In many projects, the development manager is hired with the scope of work that spans both the acquisition and development phases. The list of development management tasks can be summerized as follows:Risk Management:
Identify risks and develop strategies to mitigate them. Early input from different stakeholders would help identifying the risks and opportunities
Feasibility Analysis:
The pro-forma created during the land acquisition process can undergo a massive change during the development phase. This is because the development types in the project might change, the municipality might require some additional components, the market change might demand the owner to change one or more revenue items, or the neighborhood inputs might suggest a change in one or more features or . For example, neighbors might ask for additional visitor parkings so that their street is not always full. The city might ask for employment space in order to create a and walkable community, and the sudden change in market might encourage the team to change the office space to rental residential units. In addition, more details should be added to the pro-forma. For instance, while the pro-forma was designed by only specifying the total floor area for each development type, at this stage, the development manager would do the unit-mix design, add parking, and determine the number of storages all of which could significantly affect the revenue.
Consultant Management:
Development management at its core is managing a team toward a common goad, receiving the development permit. So, the development manager is a team builder responsible to hire the consultants and the marketing team
(if project requires pre-sale prior as a construction loan condition). The development manager should create a list of consultants by finding out what drawings are required for the develompent permit applications.
These drawings depend on the project complexity and the municipality requirements. Some municipalities require detailed design for architectural, landscape, and civil, while others require detailed design from environmental and
energy modeler as well.
In most cases, the development manager is also responsible to review and approve the invoices according to a schedule of value that assigns value to each milestone.
For example, the concept drawings might be valued at 10% of the architectural contract, while at IFC drawings, the architectural contract is at 65% completion.
- Sourcing consultants
- Drafting scope of work for each consultant
- Negotiation and entering into agreements with consultants
- Payment to consultant according to the agreements
Project Scheduling:
Time is money. The project schedule would determine the milestones, shortest path, critical path, and resource requirements, all of which
are needed to make sure the expectation is pegged correctly, the project is not under staff, and there is a baseline to compare the project progress to. All this
is done by the development manager. Note that the detailed construction timeline is not designed at this phase. The entire construction duration is defined as a task
Development Permit Application:
The development permit application depends largely on the municipalities bylaws. Municipalities have zoning bylaws that determine the use, density, height, and other conditions a development application has to comply with.
In some municipalities, any changes from the existing use or density triggers lengthy public input phase, formal process
to change the zoning and a separate process for the development application while some require mere compliance with their official community plan (OCP) without requiring
the project to get the approval and blessing from neighborhood associations, design panel, city official, and city council. In the US and Canada, the development permit application
takes between 1 to 3 years, depending on the complexity of the project, deviation from the existing zone, bylaw requirements, etc. The development manager is responsible to carefully chart
the course, update the pro-forma or create more detailed pro-forma, find out the requirement for each application, communicate the requirement to the architect and other professionals, fill in the
development permit application forms, and pay the fees. Subscription to our pro-forma product allows you to create multiple pro-formas, each for a different stage of a project, and collaborate with
different stakeholders to ensure changes to the project by various groups do not derail the project from profitability or allow you to negotiate with open eyes after each change or requirement.
Here is a list of tasks the development manager has to do:
- Coordinating with neighborhood associations, community leaders, and immediate neighbors
- Designing the highest and best use building and pro-forma
- Rezoning the property (if required) and applying for the development permit
- Conducting public hearing (if required)
- Attending meetings with municipality staff and council members
- Coordinating with the lawyers to consolidate parcels, register municipality conditions on title, convenants, easements, etc.
Cost control and Financing Management:
During the development management phase, the developer manager is responsible to control the invoices issued by the consultants. These invoices along with
the municipal fees need to be paid by the sponsor (GP). The development manager does this by checking the deliverables against the schedule of value in the
agreement with the consultants. If the invoice is accurate, the invoice will receive approval and is sent to the GP for payment. Here is a list of items the development
manager has to do:
- Coordinating with lender to receive funds as the work progresses
- Creating payment schedule for each consultant
- Controlling invoices
- Issuing change orders
- Updating budgets: Working with the owner in case the project requires additional funding due to changes in municipality's requirements, environmental challenges, meeting neighborhood demands, etc.
- Paying municipality fees
Range:
Development management fees typically fall within the range of 3% to 8% of the total project cost. The development management firm might also charge based on hourly rates or charge a fixed percentage rate for a portion of the job and hourly rate for change orders for changes made to the approved design by the owner or the municipality. For instance, if the project is designed and received positive feedback from the municipality's staff for a certain density and then during the public hearing is required to also provide additional employment space, parkings, etc. the development manager may charge the owner extra fees to change the design to comply with the additional requirements. Note that this fee would be on top of the fees charged by each consultant to change the design as per the new requirements.Construction Management Fee
Construction management fees pertain to the oversight of the actual building process. Construction managers ensure that the project adheres to design specifications, timelines, and budgets, thus facilitating the successful completion of the development.Process:
Everything starts with a plan. At this point, the plans are drawned ready for tendering process. These plans are often called Issued for Tender (IFT) or Issued for Pricing (IFP). The construction manager is in charge of creating budget and timeline based on these plans. The more detailed the plans, the less chances for change orders. So, the construction managers would always prefer to have the Issued for Construction (IFC) drawings before entering into contracts with the trades. So, the construction budget is initially produced using the IFP or IFT drawings. Some contracts are entered into using the IFP drawings. For example, the excavation contract does not require the door and window schedules, so it can proceed with an IFT drawings. Construction managers collaborate with contractors, subcontractors, and labor forces to ensure seamless coordination. They manage procurement, quality control, and safety measures, all while maintaining effective communication between stakeholders. The construction management fee is often calculated as a percentage of the construction budget and compensates the manager's efforts in overseeing the physical realization of the project.Range:
The construction management fee typically ranges from 2% to 5% of the total construction cost.Asset Management Fee
Once the development is complete and operational, asset management fees are paid to compensate for the work required to rent and operate the building. Asset managers focus on optimizing the property's performance, enhancing its value, and ensuring long-term profitability for investors. They hire contractors to ensure the building is maintained, the units are rented, property tax is paid on time, etc.Process:
Asset managers monitor the property's financial health, tenant relations, lease agreements, and maintenance requirements. They strategize to increase occupancy rates, manage rent rolls, and implement cost-saving measures. The asset management fee is usually calculated as a percentage of the property's income, reflecting the manager's role in maximizing returns and minimizing risks for investors.
Range:
Asset management fees generally span 1% to 3% of the property's gross annual income.
Financing Management Fee
Financing management fees pertain to the management of financial aspects throughout the project's lifecycle, including sourcing funds, structuring loans, and managing financial relationships.
Process:
Financing managers work to secure appropriate funding sources, negotiate loan terms, and ensure compliance with financial covenants. They monitor the project's financial health, manage cash flow, and coordinate with lenders and investors. The financing management fee can be a percentage of the total financing amount or a fixed fee, compensating the manager for their efforts in optimizing the financial structure of the project.
Range:
Financing management fees are often between 0.5% and 2% of the total financing amount.
Sales Management Fee
In projects involving the sale of individual units or properties, a sales management fee compensates the managers responsible for marketing, sales, and transactions.
Process:
Sales managers devise marketing strategies, showcase the property's features, manage buyer inquiries, and oversee the sales process. They handle negotiations, paperwork, and closing procedures. The sales management fee is usually calculated as a percentage of the total sales revenue and compensates the manager for their role in driving successful transactions.
Range:
Sales management fees can vary from 1% to 5% of the total sales revenue.
Incentive and Performance Fees
In addition to the core management fees, incentive and performance fees incentivize managers to achieve specific project milestones, targets, or outcomes.
Process:
These fees are often tied to achieving predetermined benchmarks, such as completing the project ahead of schedule, staying under budget, or achieving higher-than-expected returns. Incentive and performance fees can vary greatly depending on the nature of the goals and the potential impact on the project's success. They align the manager's interests with the investors' goals and reward exceptional performance.
Range
Incentive and performance fees can vary widely, often falling within the range of 5% to 20% of achieved performance metrics.
Conclusion
The world of real estate development is a dynamic ecosystem where a myriad of management fees interplay to drive successful projects. Each fee type serves a unique purpose, catering to different phases and facets of development. Whether it's overseeing planning, construction, financing, sales, operations, or performance milestones, these fees reflect the expertise, effort, and value that development professionals contribute to the project's overall success. Understanding the nuances of these fees is crucial for both investors and developers, as it fosters transparency, aligns expectations, and ultimately leads to well-executed and profitable real estate ventures.