How does the Developer get paid, and when?
Investor · Detroit, MI · Member since 2008 · 296 posts · 11 votes
I had another quick question. I was wondering how else a developer gets paid from a real estate development, other than selling ownership. I was reading about Donald Trump and how he was paid management and construction fees to oversee the development. But how exactly does this work? Who cuts the check to Trump? For example... If I wanted to do a mixed use development in downtown chicago and I structured financing via bank loans and private investors, and I'm scheduled to break grown within one month... how exactly would I get paid during the contruction of the building? Also, since Trump is the CEO of his own company, does he just cut himself a check, or does his partners pay him?
A company would be formed. Investors would put money into the company. That's not Donald's money, its the company's money.
Donald could be both an investor an an employee. CEO's are usually both. They could get paid multiple ways.
One is just their paycheck. Like all the other employees, they get a check every two weeks or whatever. If the company is of any significant size, they would have a payroll department, or would outsource payroll to a company like ADP.
Second is dividends or distributions from their stock. When a company is building up, such as a high tech startup when its trying to grow, or a real estate developer as they're doing the building, there would not typically be any distributions. Once the units were built and were being old, however, the company might make distributions of the profits to the share holders. If the company was formed specifically to build one building or do a specific deal, when its finished, any remaining money, both original contributions and profits, would get distributed back to the owners.
When a group of people forms a company, and sells of shares in the corporation (or uints in an LLC), they often keep some for themselves. Bill Gates, for example, kept a lot of Microsoft stock for himself as they were doing their public offerings. So, even though the founders of a company may not put in much money, they may end up with owning a significant chunk of the company.
Large corporations are controlled by a "board of directors". There is a chairman, and a group of directors. Ultimately, they make the decisions about the company, and the CEO executes those decisions. So, even CEOs have bosses. The board of directors can, and very often does, give the CEO, other executives and sometimes even employees, various sorts of bonuses. Sometimes in cash, sometimes as stock options or restricted shares. Now, in reality, the same person is very often the CEO and the chairman of the board of directors. So, that same person could recommend to the board to give himself a big bonus, get the board to approve it, and collect the money.
The Donald is not going to be cutting checks. An accounting or payroll department would do that. In a small LLC, its is possible.
I think for the most part, people who start and run large development projects aren't worried about collecting a weekly paycheck. They have money, or else they wouldn't be starting projects like this.
Trump Entertainment, Donald's company that owns casinos in Atlantic City, filed bankruptcy on Feb 17. You don't really think that means he's personally broke :-).
Now, there are small companies, or even individuals who build individual houses. I've spoken with several at our REIA. They're really not very different than fix-and-flippers. They just do more work. The find a lot, build a house, sell it, and get paid. They either use their own money, or they get financing from a bank, or have a money partner. But, just like a fix-and-flipper, or a wholesaler, they get a paycheck at the end of the deal.
A company would be formed. Investors would put money into the company. That's not Donald's money, its the company's money.
Donald could be both an investor an an employee. CEO's are usually both. They could get paid multiple ways.
One is just their paycheck. Like all the other employees, they get a check every two weeks or whatever. If the company is of any significant size, they would have a payroll department, or would outsource payroll to a company like ADP.
Second is dividends or distributions from their stock. When a company is building up, such as a high tech startup when its trying to grow, or a real estate developer as they're doing the building, there would not typically be any distributions. Once the units were built and were being old, however, the company might make distributions of the profits to the share holders. If the company was formed specifically to build one building or do a specific deal, when its finished, any remaining money, both original contributions and profits, would get distributed back to the owners.
When a group of people forms a company, and sells of shares in the corporation (or uints in an LLC), they often keep some for themselves. Bill Gates, for example, kept a lot of Microsoft stock for himself as they were doing their public offerings. So, even though the founders of a company may not put in much money, they may end up with owning a significant chunk of the company.
Large corporations are controlled by a "board of directors". There is a chairman, and a group of directors. Ultimately, they make the decisions about the company, and the CEO executes those decisions. So, even CEOs have bosses. The board of directors can, and very often does, give the CEO, other executives and sometimes even employees, various sorts of bonuses. Sometimes in cash, sometimes as stock options or restricted shares. Now, in reality, the same person is very often the CEO and the chairman of the board of directors. So, that same person could recommend to the board to give himself a big bonus, get the board to approve it, and collect the money.
The Donald is not going to be cutting checks. An accounting or payroll department would do that. In a small LLC, its is possible.
I think for the most part, people who start and run large development projects aren't worried about collecting a weekly paycheck. They have money, or else they wouldn't be starting projects like this.
Trump Entertainment, Donald's company that owns casinos in Atlantic City, filed bankruptcy on Feb 17. You don't really think that means he's personally broke :-).
Now, there are small companies, or even individuals who build individual houses. I've spoken with several at our REIA. They're really not very different than fix-and-flippers. They just do more work. The find a lot, build a house, sell it, and get paid. They either use their own money, or they get financing from a bank, or have a money partner. But, just like a fix-and-flipper, or a wholesaler, they get a paycheck at the end of the deal.
So what's that I read about him recieving management and construction fees during the construction process? And with a smaller development firm with no board of directors, how does a developer decide how much money he/she should recieve in salary?
Even for a small company, you have the same ways of getting paid - salary or distributions. How much you get paid will depend very strongly on how much you make. A developer is, for all practical purposes, a manufacturer. Just like someone who runs a shoe factory. He buys raw materials and uses them to manufacture houses which he then sells. If she (trying to be balanced, sorry I'm lazy) makes a good profit on what she sells, she can take a lot of money out. If she doesn't make much, or loses money, she would only take a little, or even nothing. Even worse, she might have to be putting money in to try to keep the business afloat.
A developer, like a manufactuer or retailer, has to have a certain amount of cash in the business. A retailer has to have inventory. So, maybe a shoe store has to have $100K of stock on the shelves at all times. If they sell some of that, buy some more, pay the employees and bills, and have $5K left at the end of the month, the owner can take that five grand. If they're break even, or negative because of slow sales, the owner might take nothing. He might choose to not buy more inventory so he can try to generate a little profit next month. But that doesn't work for long. Eventually, he would sell nothing because there's no inventory.
A developer is the same. They have to buy land and materials, and pay employees. So, they have a lot of cash invested. If they choose to grab the cash after they sell a house, and not keep that money in the company to fund the next house, their business grinds to a halt.
If you're really interested in doing this long term, I'd suggest you purse a degree in it or in business with a real estate specialization.
The development company I work for buys land, rezones and permits the land for development, and builds our product on the land, which happens to be apartment buildings. Some companies, like ours, work as one company because we keep all of our communities and profit from the rents that we collect.
Most people start out as a single person or couple of buddies that get together to develop land. Typically they buy the land and design their project the way they want. Once the due diligence and approvals are complete they need to build it. This single person or buddies may not have any construction experience at all so they have to hire a general contractor to build and manage the construction. The developers pay the general contractor to do the work.
After they have developed a number of projects and have gained a ton of experience working with different general contractors the buddies can decide to start being their own general contractor. Some developers will then set up two companies, one for the development and one for the construction. In the case when you here a developer getting paid for construction it is likely because they own both companies and Joe the developer pays Joe the contractor to build the project. In general terms Joe pays himself (you would have to talk to an accountant or attorney to learn more on setting these entities up right). That may be the reason you hear or read that Donald got paid to construct a building.
There are many pluses and minuses to creating a business like this but they only become apparent once you start down the path.
Thanks Corey. Hey do you know of any case studies that are great to look at? Where can I find them?
Tiara, Urban Land Institute has a number of books you might find interesting. Unfortunately, they're all pretty pricey. I bought the one on mixed use development a while back and found it pretty informative. It includes a number of case studies on various mixed use projects.
Just my opinion Tiara, but you are looking to bite off quite a bit more than you can chew as a newbie investor. I have read several posts from you in different thread catagories. YOu have described being a landlord, bulk reo distributor, distressed assets buyer/seller and now a developer.
I suggest you choose one, learn as much as you can about it and do it.
Putting your hand in several pies will prevent you from ever eating any of it.
Thanks Jon. Oh...nationwidepi, I am a wholesaler, for now. Becoming a developer is my ultimate goal, I am just in the forums learning more.
Jon is right on with the Urban Land Institute. I have a copy of "Real Estate Development, Principles and Process" which is good if you are a text-book kind of reader. ULI is a good resource for general land development practices.
Keep in mind there are specific organizations that you can investigate for each area of land development; Multi-Family, Retail, Industrial, Health Care and Office.
For example the International Council of Shopping Centers (ICSC.org) is a great resource for Retail Development. Just type "multi family" in a search engine and it brings up all kinds of news and groups. It is overwhelming the info you can find.
Can anyone suggest a compensation model for my possible investors? I have years of brokerage experience and have found a decent market. I would like to rehab multi-families and hold them as income properties.
Clients of mine out of state might be attracted to the opportunities to. How might I structure a deal? Per building? Would I look to simply repay them within the year, or, let them own them and receive a high management fee?
Suggestions are all appreciated.
Eddie,
Every deal is different and the return on investment is predicated upon the time frame you expect for the deal to make money via either a sale or the property or if you continue to manage the property in perpitutity.
Additionally, it also depends on how much money you as the Managing Member or General Parter are putting into the deal vs. what the Investors are putting into the deal along with who is taking the financing risk, the leasing risk, the construction risk, develompent risk, redevelopment risk, zoning risk, etc. etc. (you get the drift).
All that aside, if your investors are putting up all the money, then you would have to get their money back first, then possibly split profits 50%/50%. that would be the best you could hope for. Realistically, you probably won't do that well. Plus it depends on if your able to make fees before the investors get money back or not. Lots of moving parts here.
Also, just ask the investors what they want. They won't be shy in telling you what they expect to make and what their risk tolerance happens to be.
Hope this helps.
If you doing a development or fix & flip.