How does a development firm make money?
Can someone please explain to me how a development firm makes money? My guess would be they develop a project and then sell it for more than it cost to develop, but if anyone can give me a more detailed answer on how a firm makes money that would be great!
[{"id": "cmjjfqz", "text": "That's... what it is.  I don't really know what you're asking beyond that.", "replies": [], "depth": 1}, {"id": "cmjl6sp", "text": "For a subdivision development, a developer will purchase a large tract of land and subdivide it into smaller lots to sell the lots individually. His costs from developing the land include hard costs such as clearing and grading the land and putting in utilities and roadways. There are also soft costs for legal fees, financing fees, and design/engineering fees. Some developers/builders  will build houses on the lots while others will just sell just the land.\n\nRetail and office developers will typically build or rehab their structures and then fill it with tenants (though they can also sell off individual office/retail spaces if they choose). Their aim is to generate a stream of revenue through the rental income. However, most developers typically have an exit plan to sell these properties within 5-10 years  to cash in on the appreciation.\n\nBut yes, it all comes down to selling higher than what you put into a piece of real estate.\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n", "replies": [], "depth": 1}, {"id": "cmjn8ff", "text": "Developers with capital will finance their own deals with a combination of their own equity and debt. They will seek to make a return on that capital by building a building and creating value greater than what they invested.\n\nSome smaller developers will line up a money partner's equity and must meet a hurdle rate to earn a return on the project. Other times, developers will take a fee to build a project. Finally, not all developers actually build anything. Really small/startup developers can earn money by entitling properties by obtaining variances or changing the zoning from the zoning board.\n\n", "replies": [], "depth": 1}, {"id": "cmlsaa0", "text": "The short answer is sell the buildings for more than the combined cost of the land, soft costs, financing costs, and construction costs. Most developers get most of their funds from equity partners. They have a profit sharing schedule with different splits depending on how much the return is. ", "replies": [{"id": "cmltihp", "text": "thanks, i think this is the answer i was looking for, just had some confusion on the equity part", "replies": [{"id": "cnh30ci", "text": "A development fee of 3-5% is also included as part of the project cost.  Typical equity costs about 12-15% a year, compounded. Which adds up fast considering you don't start leasing until month 12, in multi family. ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "cmn5asr", "text": "\nVery few developers (at least in multi-family and hotels (my area of expertise) ) make money by selling a project for more than it cost to develop - primarily because they are rarely taking the full equity risk, I.e. - they aren't putting up the money to do the project. Usually developers put up anywhere between 1% to 10% of the required equity. \n\n\nLet's assume for a moment a multi-family developer, lots of different models:\n\n1. Merchant builder : essentially builds and stabilizes a property and sells to an institution. Mostly they just make fees developer fee :2% -4%, CM fee 4% - 7%. There are nuances to this. The developer usually has little to no equity in the deal. On a $50m project these fees can add up to over $5m. As they have little to no equity in the deal, the actual investment return is pretty huge. \n\n2. Hybrid - similar to the above, but the developer has more equity in the deal (usually 1% to 10%) and takes a promote. Say a development is $35m. The construction loan is $25m. The developer puts up usually up to $1m and is the GP, and another partner puts up the $9m (the LP). The LP gets a pref return - say 10%, then there are splits, say 25%/75% up to a 15% IRR, and to are it simple say 40%/60% thereafter. This means aft the LP gets a 10% return, any remaining cash flow is split 25% to the developer (GP), and 75% to the LP. The developer also gets fees as in the example above (again a million nuances). Let's say the fees total, $3m, and after all the splits another $3m on the back, so $6m on a $1m investment - not bad ( and this is overly simplistic) - but you get the idea. \n\nThere are a lot of issues not covered. For instance land, some \"developers\" primarily profit by buying unentitled land , doing yeh work to get entitled and the either selling to the merchant builder or JV'ing as in #2 and contributing the land to the JV at a higher value, and hence that becomes their equity (not preferred for a lot of reasons)\n\nWho is providing the recourse guaranty for the construction loan. And much more Importantky who is providing the completion guaranty.\n\nAlso is the developer also the GC- or is the GC a third party? \n\nThen there are issues of the contract. Almost always a GMAX contract.  JT who pays for cost overruns? Usually requires a bond.\n\nDevelopment is tricky business, lots of risk. \n\nI am not going into detail. But can explain in detail if you like. ", "replies": [], "depth": 1}, {"id": "ixgp975", "text": "If you want to make some money, try [**this survey site**](https://iridescent-donut-a65f86.netlify.app/). They pay $400 per week. All you need is to enter your email address in their website to qualify. You will get paid for your opinion.", "replies": [], "depth": 1}]