The 5 Fundamental Components of Real Estate Development

What is Real Estate Development?

In this article, we want to cover the basics of what a real estate developer does and how we make money.

My purpose for outlining this is for you to have a pragmatic and fundamental definition of what a real estate developer is and does - where this definition can be used anywhere at anytime to be more effective, strategic, and competitive. I want to provide the description, meaning, relevance, value and purpose of the real estate development (“RED”) process and for your offer as a real estate developer

This will give you the ability to communicate, coordinate, and cooperate with those in your networks; to be more strategic, effective, and competitive, as you begin your career as a real estate developer, either brand new to the business, or as a seasoned investor finding the need to produce new value in real estate for yourself and your family. This fundamental approach of description, meaning, relevance, value and purpose (which can be applied to anything anywhere to increase effectiveness) can also help build your career if you are already a developer.

Description

Fundamentally, the description of a real estate developer is that we are entrepreneurs and business people in real estate that create new real estate assets where they did not exist before, by changing one type of asset to another. Real estate developers are change agents; we change a raw piece of land into apartments, we change one type of real estate assets into another type and create value while doing so.

There are 7 tactics that developers use in fulfilling their strategic intentions of delivering profitable real estate projects. A tactic is an interim action you are in to move you towards your objective, these tactics are:

• Find land
• Design economically feasible product types (i.e. apartments, homes, lots, office space, retail, etc)
• Obtain governmental approvals of your design within the framework of zoning and building codes, and political forces (neighbors, politicians, city staff).
• Obtain debt and equity financing to build the project
• Build the project on time and on budget
• Lease up the project (rent units, lease office space)
• Sell the project to the end user (new owner if apartments or office space, sell home if developer single family, sell lots if land development).

Meaning

The meaning of real estate development is what consequences or effects are produced through the development process undertaken for our projects:

• We produce profits for our investors and our companies
• We produce new housing units or office space
• We produce economic benefit to the neighborhood or city we are producing new projects in
• We produce positive political change through our efforts to produce new real estate innovations

Relevance

The relevance of real estate development or a developer is measured in how coherent are we with the markets that we work in: the market cycles, the demographic cycles, and the political environment.

The reason relevance is important is that without coherence to the marketplace and other economic and political forces, our offer will fail or have no (or low) economic value. We want to be coherent to produce highest value for our capital investors, our main customer, in the RED business.

So an example of relevance in the RED field would be how we approach the political environment in seeking approval for our projects. As developers, we must make assessments of how coherent our offers are to the political forces in play, so that we don’t run smack into a brick wall. Neighbors adjacent to our projects can be a powerful political influence in the political process. While we are change agents, and sometime produce change that we think is good for the area, our own assessments of coherence and how actually coherent we are with these forces can produce life or death for our projects. We want to work on projects that succeed, and effective assessments of coherence are critical.

Value

The value of our RED activities is where most people have working knowledge about developers or the development business, i.e. “Developers make a lot of money” For this article, I want you to focus on the value we produce for our investors, the actions we are in to produce and maintain profitability for our RED projects and for our company. In the long run, lower, no, or negative value projects will have you exit the business altogether. So first an orientation for customer (investor) profits, and ONLY after customer profits come developer profits. This is fundamental, and where the “developers make a lot of money”narrative is a false truth. Don’t get me wrong, a good developer does and will make money, but for long term sustainable success, the customer/investor should make money first.

Purpose

Our purpose is to provide a market superior yield to our investors, profits to our company, to improve existing neighborhoods, and to provide market rate and moderate income rental housing to families.

Purposes are the most important part of the equation. Without purpose it is near impossible to hold our ambitions effectively for the future. 

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Scott Choppin is the Founder and CEO of the Urban Pacific Group of Companies, a group of businesses focused on the urban real estate development and advisory markets. The Urban Pacific Group of Companies was founded in 2000, and focuses on the development of multi-family rental projects throughout California and the Western United States. Urban Pacific has developed real estate projects with a total historic deal valuation of over $900M. The company is based in Long Beach.

Scott Choppin, lives in Long Beach with his wife of 24 years Rebecca, where they are raising the 4th generation of the Choppin family in Long Beach - Sean Patrick, Dylan, and Jenna, ages 16, 13, and 10.