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?

Private sector real estate development in the US is a risky entrepeneurial activity. It tends to be highly financially leveraged with lenders often requiring personal guarantees from the developers. In other words, personal net worth is pledged as collateral for the loans. Developers think that the potential profit justifies the risk of default. The only prerequisites for developers are a tolerance of risk and seed capital. The people that have these attributes in the most advantagious form are frequently 2nd and 3rd generation developers. They have capital and an inherited understanding of the industry. However, in the US, anyone can attempt to compete, and those that accept the challenge tend to come from closely related businesses such as brokerage, construction, design, and finance. Only recently, has the academic community begun to acknowledge that real estate development is a legitmate discipline deserving of investigation. It largely remains unproven whether academic training specific to this field will yield success. Finally, it is important to note the contributions of attorneys in this field. A significant percentage of developers have legal backgrounds. Critical analysis skills, government bureaucracy navigational skills, and insider information obtained from consulting; all seem to help in development endeavors. For entry level young adults, the credentials that real estate development firms value the highest are dual masters degrees from prestigious universities in business administration and in law.

The Economics 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.