How and when do real estate developers get paid? At the same time as CRE agents?
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[{"id": "fq58qcc", "text": "Depends.  The investor might be a \u201cvalue\u201d investor and plans to flip the project and get a return/capital gain from their investment when they sell. Or, the investor might be an \u201cincome\u201d investor and retain the asset after it\u2019s developed and receive a monthly or annual return/income.", "replies": [], "depth": 1}, {"id": "fq5jnt1", "text": "The answer is dependent on the financial structure of the project or investment the RE developer is pursuing Here are a few scenarios I\u2019ve seen:\n\n1. Fee Developer (Hired as a professional consultant with no equity in project) - The sponsor typically pays a developer fee over course of project on a monthly basis or quarterly basis. For example, a $500k fee paid monthly over 2 years. I\u2019ve seen with large foreign investor that need local real estate expertise or really anyone with money that need development services. \n\n2. Sales - Most developments depend on sales for profitability. For example, selling out the condos, selling retail or commercial spaces, or selling entire houses or rental buildings. The sales usually commence near the end of project, though it possible to sell early on in the dev process. Money is usually fully collected once project is complete and buyer is able to take over. \n\n3. Refinancing - This is for developers that hold assets rather than selling. Basically have a bank or investor issue a new loan on the property for a higher amount, thus allowing you to pay off previous loan (smaller amount) and pocket the remaining balance. \n\n4. Rental income - Some projects are built only for rental income. For these payment starts as soon as leases are signed. Developers will hold these for long periods of times, sale after full lease up, or refinance. \n\nThings get tricker if you have complicated capital stacks (multiple investors) or if you deal with HUD in the affordable/workforce housing space. Also, RE brokers are one of the first to get paid once a deal closes. Developers have to spend thousands, sometimes millions up front during the due diligence process when purchasing a property. Developers may not see a profit for many years, sometimes never.\n\nThese are just a few common scenarios I\u2019ve seen. I\u2019m sure there a many more ways.", "replies": [{"id": "fq5tpv8", "text": "To add to this good comment: you can also be a developer at different stages of a project. For example buying raw land and getting it entitled for lots, graded, and permitted for new home building is (land) development, and will add a bunch of value without actually building a structure. You could also buy a 40 year old fully stabilized building and either plan renovations, demolition/reconstruction, or get more development allowed on the site, and all 3 actions are forms of development that would pay off differently. Also developers usually make multiples more than brokers because of leverage (frequently using mostly someone else\u2019s money as equity and no-recourse loans), the benefits of land speculation, and large barriers to entry in the industry.", "replies": [], "depth": 2}, {"id": "fq5vmbr", "text": "I saw a complete meltdown at a RE Brokerage a few months ago where the borrower bought the land from the builder and then their construction loan paid the builder to build the house.  Of course, the agent's contract said they got paid for the purchases.  Agent had a verbal deal with the builder that they would be paid for the whole project and hadn't thought about the whole thing.  I had to explain to the agent that the purchase was only the land, you don't get paid on loan amounts, as she wasn't a broker.      \n\nI saw her two weeks later, she seemed to be out of meltdown mode, but not sure how she fixed it.  Probably with the builder.", "replies": [], "depth": 2}, {"id": "fq6miv9", "text": "Another option is called a \u201crecap\u201d or recapitalization. It\u2019s essentially a hybrid of the options you laid out. The developer sells a partial interest (usually up to 49%) to another equity jv partner, at the market value basis. Combine that with \u201cacquisition\u201d financing for the jv and the developer is essentially cashed out, with a substantial return of equity, still owns a controlling interest in the asset and charges an asset management fee to the equity partner. This is what my firm does on all of our developments. Then we sell the asset later on (when we think we\u2019re at peak value) and provide a loan to the new buyer.", "replies": [{"id": "fq8c30z", "text": "can you share any more details? Is this structure typically for very large transactions only? Sounds pretty advanced.", "replies": [{"id": "fq8ui0e", "text": "It\u2019s typical for large institutional transactions. Not sure about smaller middle market guys- that\u2019s not my field. I don\u2019t do deals less than $50M so I honestly would just be speculating if I tried to answer for smaller players - maybe someone else reading can give some color?\n\nLarge deal I did last year was pretty complex. Sponsor brought in a JV partner to recap the deal. I provided the first mortgage ($250MM) and leveraged my position with a syndication of a couple banks, one of which was foreign based. I was negotiating with 6 parties at once - it was a bitch to close but makes a great story to tell on panel discussions.\n\nThe sponsor had owned it for a couple cycles so at this point they didn\u2019t have much cash equity in the property at all - the partial interest they sold was pure profit. It\u2019s still generating a ~6% cap today... levered return around 8.5%.\n\nNot sure what questions/ details you\u2019re looking for but happy to share what I can.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fq5udip", "text": "The returns are so high because the risks are too. Everyone gets paid before the developer. I\u2019m most familiar with residential subdivisions and the developer will pay for engineering and approvals, close on the land, do the site work, then start selling off the lots. The early lot sales pay the loans. They don\u2019t take a profit until near the end.", "replies": [], "depth": 1}, {"id": "fq5vh06", "text": "As soon as they can get their investors back out of the deal. This is why most are merchant developers - build it, lease it, sell it. Developer I worked for out of college used to say that he wouldn\u2019t make any money until 5 years after he built something. That wasn\u2019t entirely true as he made some money off the NOI, but the big wave came with the refinance.\n\nOn more sizable developments, you\u2019ll see fees charged to the fund - I.e. development fees and brokerage fees, so the developer scrapes some money off along the way. Again though, the real money isn\u2019t made until the investors are back out of the deal and the waterfall flips or extinguishes.", "replies": [], "depth": 1}, {"id": "fq5xjcx", "text": "This question has many answers but in short developers have the opportunity to make the most money in real estate. \n\nUsually developers use their own money or the money of investors so they have the potential to lose it all. \n\nThey are the last to get paid. They get paid at the end of a project by the group that employed them or when the sell the project.", "replies": [], "depth": 1}, {"id": "fq7ajvs", "text": "Depends if you own the land, have equity position, points on the deal, residual income, you name it. You can get very creative and structure how you get paid.", "replies": [], "depth": 1}]