The typical fees associated with a merchant builder depend on the specifics of the deal. Generally, merchant builders will contribute 10-20% of the capital required for the deal, and will receive a preferred return on their initial equity investment. This preferred return can be implemented in a variety of different ways, such as a fixed rate of return or a percentage of the profits. Additionally, merchant builders may receive a fee for their services, such as a percentage of the total construction costs or a flat fee.
For instance, if a merchant builder wants to build a $5 million single-tenant property for a drug store, and can get commercial financing up to 75% LTV, they will need a down payment of about $1.25 million. Developers often contribute about 10-20% to such deals, so, with a 15% contribution, the developer will put down $187,500, the investors will contribute about $1.06 million, and the developer will have a construction loan of approximately $3.75 million.
If, at the end of the building period, the building is sold for $6 million, this would leave the developer and the investors with about $1 million in pre-tax profit after the repayment of their construction loan. In most cases, both parties will agree on preferred return for the initial equity they have invested in the project, which can be implemented in a variety of different ways. For instance, if the preferred return is 15%, the developer/merchant builder would receive $28,125, while the investors would get around $159,000. The remaining $850,000 or profit is likely to be divided more equally between the developer and the investors, with a 50/50 arrangement being somewhat common. This would provide about $425,000 in returns for both parties.