Real Estate Web Design - Information

A real estate developer (American English) or property developer (British English) makes improvements of some kind to real property, thereby increasing its value. The developer may be an individual, but is more often a partnership, limited liability company or corporation.

There are two major categories of real estate development activity: land development and building development (also known as project development).

Land developers

Land developers typically acquire raw land (real property with no improvements or infrastructure) and improve it with utility connections, roads, earth grading, covenants, and entitlements. Infrastructure improvement provides a base for further development of built improvements. Covenants define the context in which future development of built improvements may take place (often in the form of deed restrictions on particular parcels: a sort of "private zoning code" limited only to those properties). Entitlements are secured legal permissions from regulatory bodies (typically in the form of permits, but sometimes in the form of re-zoning or planned unit developments). Once these improvements have been made to the raw land, it is typically subdivided and sold piecemeal at a profit to Building Developers or individuals.

Building developers

Building developers acquire raw land, improved land, and/or redevelopable property in order to construct building projects. The buildings are then sold entirely or in part to others (usually for a significant profit), or retained as assets to produce cash flow via rents and other means. Some building developers have their own internal departments for designing and constructing buildings (more common among smaller developers), while others subcontract these parts of the work to third parties (typical of larger developers). Where do developers come from?

Although there are specific educational programs which are tailored to teaching real estate finance with an emphasis on development (typical MBA programs at university-level business schools), most real estate developers enter the business from other professional areas. Most often, persons in related fields (architecture, accounting, engineering, construction, planning, etc.) enter into real estate development via personal interest and opportunity, and then choose to make a career out of it if successful. An educational background in finance is typically a prerequisite for obtaining entry-level employment with an established development company, although many development company managers tend to come from architecture and related fields. Real estate development requires extensive and complex financing arrangements to be successful, as few people or organizations have the money to undertake development projects on their own (see below). The business of real estate development

Real estate development is first and foremost a cash flow business.

Real estate is, by its nature, an expensive non-liquid asset. This means that it costs a lot of money to own it, and it can be difficult to sell. In development activity, there are also the added costs of improvements themselves (typically called "hard costs") and the fees of various and sundry consultants necessary to get the work done properly (typically called "soft costs"). Because expense is high, sale is difficult, and return on investment is delayed, real estate investment is inherently risky. A large part of the work of developers is the management of risk.

Because the amounts of money involved are typically very large, a majority of real estate development projects are financed with a large amount of debt leverage. While more leverage increases potential profit, it also magnifies risks and builds in a periodic negative cash flow (regular payments on the debt). Projects will generally be profitable if the upfront commitment of cash is kept to a minimum and the project can quickly start generating a positive cash flow sufficient to cover debt service.

There are almost as many ways to finance a real estate development project as there are development projects. However, most financing arrangements fall into a few broad categories:

Private investors (pension funds, insurance funds, wealthy individuals, joint ventures, etc.)

Public investors (REITs, share offerings, public-private partnerships, etc.)

Private debt (individual loans, bank mortgages, construction loans, etc.)

Public debt (redevelopment loans, etc.)

Private grants (non-profit target grants, etc.)

Public grants (anti-blight subsidies, affordable housing credits, tax incentives, historic preservation grants, etc.)

Equity financing (use of cash flows from other projects owned by the developer)

Subordination

Successful real estate developers can become enormously wealthy due to the large sums of money being transacted and the value of the assets they control. However, because of the illiquidity of their assets, they are also very often cash-poor. Inability to remain cash solvent is the primary cause of business failure for real estate developers. The process of real estate development

Although the process for development of real estate varies from project to project, the various phases can be categorized roughly as follows (in approximate chronological order):

Market research

Site selection / feasibility analysis

Due diligence / preliminary pro forma

Property acquisition

Project design / refined pro forma

Obtain entitlements

Financing / final pro forma

Construction

Lease-up / sales

Operation (in cases where the project is retained as an asset)