Daniel Norris explains the different roles of developers and development managers
The terms “developer” and “development manager” are often confused, partly because developers do manage developments. But they are different, distinct roles and a clear understanding of the two roles is a threshold requirement for anyone embarking on development work.
The developer
The developer takes primary responsibility for a development, and orchestrates nearly everyone else involved in a development scheme with the exception of any funder. While other consultants may be involved at different phases of the scheme, the developer is there throughout.
Finding the opportunity
The starting point is finding the development opportunity, and usually the developer is the one who finds it. For tax and cash flow reasons the developer often won’t buy the land, but buys an option over it so that it can call for the land to be transferred to it or a third party at a later date, usually before the development commences to minimise stamp duty land tax. However, the developer may also get brought in by a landowner who wants to keep the land but needs the developer’s skills to develop it.
Employing the professional team and building contractor
Either way, the developer then has the opportunity to deliver a development. If a planning permission is needed, the developer will likely bring on a planning consultant. The developer will also employ the professional team: typically an architect, quantity surveyor (who works out how much it will cost to build), structural and services engineers and an employer’s agent (who monitors the building contractor on a day-to-day level).
The developer will also employ the building contractor. The building contract is usually one of several versions of JCT standard form, and the contractor takes on different degrees of design and management responsibility, depending on which version is used. The basic principle is the same however, which is that the contractor is the person who actually builds the building. It is the contractor (using various subcontractors) who will dig the holes, erect the steelwork, pour in the concrete, attach the cladding, install the lifts, etc.
The employer’s agent will act as the developer’s eyes and ears, but acts independently to make sure that the contractor does what it should do. The developer will similarly be monitoring the professional team. If any of them are not doing what they should, then it will fall to the developer (as the employer) to take appropriate action.
The developer lets/sells
The profit on a development scheme is only maximised when it is let (if it is a rental property) or sold (if, for example, it is a housing development). Being left with a built building and no tenants/buyers is a risk to the developer because it gets no receipts, having laid out a lot of money, and also because it will still have outgoings for an empty building – services still need to run, security is needed, rates need to be paid, etc. The developer will therefore be looking to let or sell as soon as possible.
So, the developer will also control the letting/sales strategy and will look to do the best deals it can. On lettings it is likely to want to create a development that has the maximum value in the commercial real estate market, and the developer will bring in letting agents to help it achieve that. On sales (particularly residential sales), the developer will often market directly.
To maximise profit, the developer will want to enter into contracts with buyers/tenants before the building is completed (known as forward purchases and prelets). Under these contracts, the developer will be obliged to build the building properly and to grant the lease or sell the property when it is ready.
Financing the development
Most developers need external finance to build their developments. This is not necessarily because they don’t have the cash to do it (although that might be the case – sometimes you need very deep pockets) but because it is more efficient to borrow the money. That may come from traditional bank financing.
On commercial developments, the developer may also use an equity funder’s cash on which a notional interest return is paid. This is typically provided by an investment/pension fund. When the funder commits to funding the development, it will also buy, or commit to buy, the property when certain conditions are met. A funder will usually require some control over lots of aspects of the development but particularly the letting strategy and design changes. It will also want warranty protection from the professional team and the contractor. The fund doesn’t take over the responsibility for the development though, the developer remains in charge but it contracts to build the building for the funder under a development agreement.
Delegation of responsibility, risk/reward
Although the developer will commit to a landowner or funder to deliver a development, it achieves this by delegating responsibility. It isn’t the developer who puts the concrete in, works out the size of the steels, or designs the building. Yet, by entering into a development agreement, the developer puts itself at risk if those things don’t happen (although it will try and limit its liability in the development agreement and the appointments of the team it brings in).
In return for this risk, the developer wants a decent return. It will therefore look to create a profit margin that is calculated simply by assessing the value of the finished building (taking into account letting income, or what the building is actually sold for if sold to an investor; or total plot sale consideration if a residential scheme) and deducting the total cost of development. If the developer has developed without a funder then it will keep all of the profit (after repaying any bank debt). If there is a funder, the developer will take the first X% of any profit and then it and the funder will agree how any surplus profit is shared.
Development manager
The development manager’s role is not as all-encompassing as that of a developer and the development manager takes much less risk. As its name suggests, the development manager is there to manage a development process, and the value of this role is considerable to landowners (including funders) who have the appetite for development but not the day-to-day expertise to ensure that the development is run properly. The development manager will monitor and manage the team that the owner has appointed to work on the scheme and report back with recommendations and advice as to actions the owner needs to take.
Finding the opportunity
Often, the landowner has land ready for development (and quite possibly has obtained a planning permission having previously employed a planning consultant and an architect). What the owner does not have is the expertise to deliver a development, let alone pull together the whole of the professional team and choose a building contractor. That’s where the development manager fits in.
Employing and managing the professional team and building contractor
The development manager’s responsibility here is simple. It does not enter into any of the appointments itself but recommends to the owner suitable people to be appointed. The development manager will negotiate the terms of those appointments but it is the owner that enters into the appointments.
The development manager will monitor and manage the professional team and the contractor, acting as the owner’s eyes and ears. Depending on the terms of its appointment, the development manager may have authority to give directions and instructions to the professional team and the contractor, but if they fail to do what they should, it will fall to the owner (with the development manager’s advice) to take appropriate action.
Ultimately the development manager takes no risk for non-performance by the professional team and the contractor, while a developer does.
The development manager may help in letting/selling
The development manager may be asked by the owner to help let or sell a building. If it is asked, the development manager will offer advice, including recommending letting agents, letting strategies and sale strategies. It may also take on responsibility for negotiating the terms of leases or the sale. What it won’t do, is enter into any document. The owner will do that. Before the building completes, it is the owner who is bound to tenants/buyers to build the building and to let/sell when built, so the risk of not building sits squarely with the owner.
Financing the development
The owner has usually already lined up its own finance, either from its own resources or through borrowing. The development manager sometimes assists the owner in lining up third party finance and will make recommendations and perhaps negotiate terms, but it won’t sign up to any finance agreements. The risk with those sits with the owner.
Risk/reward
Because the development manager is effectively appointed by the owner to manage the owner’s team and does not sign up to any documents or take primary responsibility for designing, building or letting/selling the building, it bears essentially no risk. As a result, its reward profile is completely different and it is usual for the development manager to receive a fee. This may be a fixed sum (paid in instalments during development) or a proportion of the total development cost, but it is rare for a development manager to receive a slice of profits.
| Who does what when using a… | Developer | Development manager (DM) |
|---|---|---|
| Employ the contractor | Developer | Owner |
| Employ the professional team | Developer | Owner |
| Negotiate lettings and sales | Developer | DM or owner |
| Enter into lettings and sales | Developer and maybe funder | Owner |
| Monitor the contractor and professional team | Developer | DM |
| Enforce appointments and the building contract | Developer | Owner |
| Liable to funder/owner for faults in development | Developer/contractor/consultants | Contractor/consultants |
Why this matters
If you don’t appreciate the difference between developers and development managers, you won’t understand the very basics of how a development is being procured – who is responsible for what, who is paying for what, who takes the risk and why the rewards are what they are.
Essentially, the developer takes primary responsibility for a development (see table) and along with this, the risk. The upside of taking on the risk is that the developer receives a share of the profit when the development is sold or let. If the developer has done a good job then the profit margin will be ample reward for the risk. Conversely, if the development overruns or there are long voids after completion, the developer’s profit reduces.
The development manager’s role, on the other hand, is not as all-encompassing and involves much less risk. The development manager manages the development process and brings expertise to the role in ensuring that the development is run properly. The development manager will monitor and manage the team that the owner has appointed to work on the scheme and report back with recommendations and advice. But the development manager does not sign up to any documents or take primary responsibility for designing or building or letting/selling the building. As the development manager bears no risk, it usually receives a fee rather than a share of the profits.
Daniel Norris is a partner at Hogan Lovells
