The 3 Headed Dragon in Real Estate Development- Bankers, Subcontractors & Brokers

The triple headed dragon in our business that makes our world go around are the following groups of support industries. The names may change, but basically these are the three.

1. Bankers/Capital Stack money players. Banks and Equity Capital companies both supply money to our industry. Equity capital is just as it sounds. In simplistic terms when borrowing from banks for construction loans these loans can be leveraged to 75%-80% of the money needed at low interest rates. Banks generally do not include money for land. They will provide a portion of borrowed funds for land development and all funds for construction. Many contractors purchase the land with their own cash- generally this is company equity. This equity is contributed at roughly 25% of the total project cost. Bankers will loan the remaining (roughly 75%) for vertical construction. In many cases builders who wish to leverage beyond the banks traditional 75% will seek out Equity capital sources. These come in a variety forms – Family office, hedge funds and source Equity. These groups provide the Equity to purchase the land and, in some cases, they can even do 100% financing for construction as well. Equity providers have very stiff ownership percentages and can put restrictions on the company they provide equity to. It is not unusual for an equity source to take 20-23% of the profits. In many cases leaving the developer partner with little more than wages for his work.

2. Subcontractors and trade partners. Gone are the days when builders have many employees and employed their own rough carpentry workers. Today a builder or even a general contractor who builds for other people for a fee is more of a sophisticated trades broker. Builders today hire subcontractors to build the parts and pieces of the vertical construction puzzle. Plumbers, electricians, HVAC contractors have always been the major players. But today builder’s employee “subs” down to the smaller jobs as well. For example, gutters, specialty items (toilet paper holders, shower enclosures, towel bars), low voltage providers and others make up the list of trades required to “broker” and complete an entire home. “I rely on long term relations with my “subs” in order to illicit loyalty, quality and timely schedules,” says Stephen Gravett.

3. Brokers- Real Estate Brokers are a huge positive for housing sales in builder’s subdivisions. Technology has given brokers many useful tools to expand their influence and gain new consumers. New website like Zillow, Trulia, and expanded MLS give both clients and brokers better tools to examine listings and builder websites. A good broker can find a prospect by its desire to buy a new home and can instantly see if they will qualify for the proper mortgage. With customers lingering on builder websites, the astute builder with a solid high-tech marketing plan can also solicit new buyers through this and other means such as Facebook, twitter, geo-fencing and e-blasts from its CRM database.

Stephen Gravett has been a real estate developer for over 45 years and was most recently CEO of Kennedy Homes for the past 11 years and is still CEO of Kennedy Development Partners (KDP) and full time Director of Operations for 5 Star Developers. He is also a state licensed broker and since 1980 a State licensed General Contractor Unlimited. He flew B-52’s in the US Air Force during the Vietnam war.

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