Project Management Fees - What is it and How to Calculate it?

When modeling real estate projects such as multifamily developments or hotel projects, there are many expenses that one must consider. One of the common expense items included in a model are project management fees.

What are Project Management Fees?

Project management fees are an elected fee that can be paid towards a number of people including the developer or the capital/equity provider. This fee is not included in the net operating income (NOI) line of a model and should be included below the line. The project management fee should not be confused with the management fee (a fee that goes to the project management company and is included in the NOI) and is included if the project charges as above the market management fee. In this case, one would include the normal management fee in the NOI and include the excess percentage below the NOI as to not effect the gross sales proceeds. For example, if the project is charging a 5% management fee, one would input a typical management fee of 3% included in the NOI and then 2% as a project management fee outside of the NOI.

Why are Project Management Fees Important?

Although project management fees are elected fees, it is important to consider whether or not your financial model should contain them. One must read the developer contracts as well as the capital or equity contributor contracts to determine if there are project management fees that should be paid to either partner. If a model does not contain project management fees the cashflows could be overstated effecting the net returns.

How to Calculate Project Management Fees

There are two primary methods used to calculate project management fees. The two methods are the monthly applied fee method and the percentage of revenue method.

Monthly Applied Fee Method

The monthly applied fee is a fixed fee amount that is employed monthly. The project management fee is pre-determined amount that will be paid each month and is typically subject to some sort of inflation as time increases. Typically, in an underwriting scenario, one would have a monthly input where you can enter the monthly project management fee. When operations begin, the project management fee is applied on a month to month basis.

Percentage of Revenue Method

The percentage of revenue method applies a project management fee percentage (anywhere from 1%-3% typically) and multiplies that percentage by the total effective gross income, or EGI. For example, lets say that the project management fee is 3% and the monthly EGI is $60,000.

Project Management Fee = 3% x $60,000 = $1,800

For that month, the project management fee is $1,800. Again, the project management fee is after the NOI and should be included below the line.

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About the Author

Eric Bergin is the founder of TSM. He realized that there was a need for real estate financial models that were more than just generic templates. He wanted to create a personalized product for his customers that would ensure success for them and their company. Please reach out to him if you have any questions regarding project management fees or if he can help you with your modeling needs.