Developer fee

A developer fee is compensation for the work of development itself: finding the site, securing entitlements, hiring the design team and contractor, arranging financing, and managing the project through completion. It is usually set as a percentage of total development cost or of hard and soft costs, and it appears in the budget as a soft cost.

The fee is distinct from the developer's return as an investor. Developers often put their own equity into a project and expect the same return on it as any other investor, plus a share of profits for having created the deal. The fee covers overhead and staff during the years before the project produces any income, when the developer is paying salaries and carrying costs out of pocket.

Lenders and investors scrutinize the fee, and in subsidized projects funded with tax credits, public agencies cap it. Part of the fee is often deferred and paid only from cash flow after the building is stabilized, which puts the developer's compensation at risk alongside the investors' money. This is the mechanism by which the developer's interest is aligned with finishing on budget.

For housing costs, the fee is part of what a new building must repay, but it is a modest share of the total. Removing it entirely would not change rent nearly as much as a change in interest rates or hard costs, and no one would do the work without it. We discuss the difference between fee and profit in Does Developer Profit Make Housing Unaffordable?.