How are developers compensated during construction?
May be a bit naive… I understand the general concept of compensation on a development project, but how are developers paid during construction? For example, a mixed use apartment complex could take months/year until finished and LP/GP receive profit. I know developers receive “management fees” but that can’t be enough to survive on for multiple years?
[{"id": "ivs5vq4", "text": "Dev get a developer fee of like 3-4% of the deal value. Gets paid over the course of construction from the equity/construction loan.", "replies": [{"id": "ivsa9np", "text": "Usually based on the project costs, both land development and vertical construction, but not land costs.", "replies": [{"id": "ivsc3pg", "text": "Was keeping it high level, but yes. Though have seen plenty of group try to include a \u201cland acq fee\u201d of like 90bps", "replies": [], "depth": 3}], "depth": 2}, {"id": "ivv8082", "text": "Correct. They usually have milestones to hit too which triggers specified amounts of $ to be released (ie- horizontal development, pad construction, cold hard shell construction, and CO).", "replies": [], "depth": 2}], "depth": 1}, {"id": "ivs7xym", "text": "FEES. there's usually profit left over", "replies": [], "depth": 1}, {"id": "ivtol1u", "text": "Management fees is the answer. Generally between 3-5% of total costs (sometimes excluding land value). \n\nAlmost as a rule, these fees will only be recieved by the GP and are intended to pay for out of pocket expenses like salaries and miscellaneous costs related to managing a development. \n\nIn typical ground-up development deals, the vast majority of profits will only be secured at completion as the project gets sold and proceeds are distributed to the GP and LPs per their agreement. \n\nMost midmarket developers will have a number of projects on the go at once, so they regularly recieve equity and profits coming back, and may also have an income producing property portfolio for cash flow.", "replies": [], "depth": 1}, {"id": "ivu1g7c", "text": "Developer Fee/Construction Management Agreement", "replies": [], "depth": 1}, {"id": "ivwlh2t", "text": "There are soooo many ways developers can get paid.  The obvious two are developer fee and management fees. They also make money as the GP and sometimes even have LP money. A lot of developers also already own the land and sell the land into the project at higher price than originally acquired. Some developers are also brokers and make that fee as well. Some developers also have there own property management company so they make that property management fee as well (which some inflate above market rates).", "replies": [], "depth": 1}, {"id": "ivwn8lo", "text": "**A snippet from an actual ProForma from a loan app**\n\nSales and Closing\t          Per Unit\t14-Units  \nAverage Unit Sale Price: 299,900 \t4,198,600   \nRE Commission:\t5%\t(14,995)\t        (209,930)  \nClosing Costs:               (2,027)\t        (28,378)  \nNet Proceeds:             282,878 \t        3,960,292   \n  \nless Variable Costs (COGS)\t(179,800)  (2,517,200)  \nless One-Time Costs\t (15,000) \t(210,000)  \nNet Proceeds after COGS\t88,078 \t1,233,092   \n  \nless Profit Due to Investors\t\t\t0 \t0   \nProfit to Developer\t\t88,078 \t1,233,092   \n\n\n*They do quite well.* **IMHO**", "replies": [{"id": "ix0wvx3", "text": "hey! this is really late but I'm not sure what the two numbers beside eachother mean? Would you please help out a CRE noob learn something new, thank you!", "replies": [{"id": "ix16xb7", "text": "1 column / number is per unit. The other column is for all 14 units in the project.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]