FEE-BASED PROPERTY DEVELOPMENT
Fee-Based Property Development, also referred to as Real Estate Fee Development or just Fee Development, is essentially a structure that allows an owner to "outsource" the role of a property developer for a pre-agreed fee, while maintaining full ownership and control. Let's explore whether this may be a good option for your next project ......
Options for Development Management
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If available and suitably qualified and experienced, utilize in-house development managers
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Interview and employ in-house development managers
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Retain a qualified and experienced Fee Development company
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Having suitably qualified and experienced in-house staff members specific to the intended project type, size and construction methods who are also available is a good solution. Staff members know the company goals, processes and procedures.
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If in-house staff members are busy working on other projects or do not have a comfort level working on large-scale or complex projects, or construction systems they have little or no experience of, a company can interview and retain additional resources. Unless a company has prior knowledge of new-hires, there would be uncertainty as to whether the new-hires will meet expectations, which is a risk factor on multi-million dollar development projects.
Retaining a Fee Development company may initially be considered a higher cost option compared to utilizing available in-house personnel; however, a qualified fee development company should provide value that justifies their fee.​
Value
In addition to risks, an owner taking on the developer role without the required experience, skill set or resources will ultimately distract them from their core business operations, goals and/or profit-making. Engaging a fee developer enables an owner to focus on what they do best.
Fee developers should have a team with all the required skills and experience, alleviating the need for owners to research and bring together multiple entities that may not have worked together before.
There are multiple construction project types and sizes with varying complexity. The team an owner may assemble for a particular project may not be the right team for their next project, resulting in an owner having to research and assemble a different team each time. A fee developer is engaged for a specific project type and an owner may choose to engage a different fee developer from project to project. As fee developers are engaged on a project by project basis, an owner will only pay for the services on an as needed basis and, therefore, will not be carrying salaries in between projects. To avoid this issue when utilizing in house staff, an owner will need to maintain a certain number of overlapping projects, which may not be feasible or align with the owner’s development strategy.
A suitably qualified and experienced fee developer should possess the most valuable risk management tool in property development - lessons learned. Implementing lessons learned during the design and preconstruction phases will mitigate mistakes that could have a significant impact on the budget, schedule, quality and funding compliance. A fee developer's fee is often a small portion of the total project budget and a good fee developer should pay for themselves by assembling and managing a design and project delivery team that can design and implement a project efficiently.
How to Select a Fee Developer
Owners should choose wisely. Qualifications and experience specific to the type, size and complexity of a project and the construction systems intended to be used should be the most important selection criteria. Deciding based on "lowest fee wins" is never advisable, unless the chosen company can demonstrate the required qualifications and experience to successfully deliver the specific project.
Before engaging, an owner should understand who will be assigned to the project. Some fee development companies are departmentalized and a different point of contact may be assigned throughout the various phases of the development. This often creates a fragmented process leading to errors through miscommunication. Ideally, the assigned project manager should represent the client throughout the entire development process and posses at least a general knowledge of all facets of property development. It is also advisable that once an owner is assigned a project manager, that the contract includes language that prevents the company from assigning a different project manager after the contract has been executed.
Wherever possible, incentives should be aligned. If, for example, the main goal of a project is timing, the fee could be structured accordingly and potentially could include certain milestone-based incentive payments. Most fee developers will based their fee on an agreed percentage of the project costs and, as such, their goal should be aligned to complete the project as soon as possible. Retaining a fee developer based on an agreed month to month fee would not align with a goal to fast track a project.
Regardless of the size and complexity of a real estate development project, it is a relatively long journey from concept to construction completion. Being contractually bound to a fee development company from Day 1 that an owner hasn't previously worked with, should be avoided. Early scopes of services should be engaged for an agreed fee first before entering into a further contract for the entire project. An owner should ensure there is nothing binding them to a company so both parties can treat the initial contract as a “try before you buy” period.
Often overlooked and not researched sufficiently is checking for potential conflicts of interest. Ideally the fee developer needs to be an independent third party entity. Does the company, or related companies, offer any other services that may benefit from their engagement? Does the company owner(s) have any interests in other businesses that may benefit from their engagement? Does the company receive any compensation or incentives to utilize certain team member entities, products or construction systems? These need to be disclosed and evaluated before engaging.
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Ultimately, deciding upon which development management solution is right for an owner is an important decision when it relates to high-dollar, clock-ticking real estate development projects. Owners, and especially smaller entities, should try to avoid making this decision on their own. A trusted committee should be assembled to evaluate all options on a project-by-project basis and if retaining a fee development company is the intended solution, the committee should apply comprehensive due diligence to select a fee developer that is suitably equipped to deliver on the owner's goals and vision.
