Commercial real estate is often viewed as one of the most stable investments in the US. The property and land each own value and that value can increase over time. It may even be used for future investments.
Developing new real estate projects isn’t as simple as many people believe it is. Many of the projects you may see being built in your neighborhood are the work of a single real estate developer who may only have a small fraction of the money actually needed to complete the development.
That’s where real estate development funding comes in. Often the developer invests some of the money out of pocket, then petitions a bank for a loan, which often accounts for most of the capital, around 60-80%. Annual interest will accrue on the loan, but the bank won’t actually have a stake in owning the property itself.
In this, banks differ from the individuals and commercial real estate investment groups that the real estate developer will petition to raise the remaining equity. These investors will have a stake in the project even before it’s completed.
In fact, even though it’s their name attached to the project, the real estate developer may end up having very little control over the development and use of their own project when their real estate investors are through. Because the developer invests such a small amount, the high net worth individuals who invest in the project often become majority owners of the new property and affect how it unfolds.
Since raising money from individuals isn’t often efficient, many developers turn to commercial real estate investment firms for funding. These companies often own an even greater majority of the project’s equity. Without a very specific, agreed-upon business plan, they can take over the property and cut the real estate developer out. Because of this trend, real estate development funding is now largely driven by these private funds.
This new wave in real estate development funding means that money is raised and projects are built, but some private funds choose to develop properties in ways that benefit their investors, not the community around the development. Developers should choose their real estate development funding partners carefully to keep this from happening.
