What is Property Development?

By D.A. Barber , last updated October 24, 2011

Property development comes in many forms, so if you’re considering starting a development business there are a few basics you should know to determine your direction. Some property developers buy properties that are “distressed” or at auctions with the goal of refurbishing them to re-sell or for rental units. Others buy individual or tracts of raw land with the intention of building homes, subdivisions, or commercial business parks, office buildings or shopping malls. Demand for such industrial space is expected to begin growing the end of 2011 into 2012, according to Commercial Real Estate Development Association. Either way, there are a number of issues that involve planning, financing and the market place you as a property developer should be aware of.

Role of Property Developers

While property developers don’t actually build things, they are part contractors, property managers and marketing people who take ideas and convert them into viable real estate properties. They buy the land or property, finance the deals, hire the building contractors and then market the finished product to rent, lease or sell. During each step, property developers must be able to communicate with a variety of private and public entities, including: city planners and inspectors; engineers and surveyors; architects and contractors; and leasing and management agents.

Developing such a property from a low to a high value usually requires a large amount of upfront capital. This is typically done using equity capital rather than borrowed cash. It is the developer who is actually taking the greatest risk and those property developments that get into trouble usually do so through unnecessary leveraging, while other developers make huge fortunes developing their properties with equity capital.

Speculative Development

Speculative property development can be the riskiest and the most lucrative type of development. This is because developing unused raw land into a residential subdivision or business park requires developing the infrastructure, including the roads, water and sewer systems, and electric utilities – all dependent on permit approval from a variety of public sector entities. And it requires a long-term investment of capital that will involve an extended period of time where you won’t see any positive cash flow. Even after the development is completed, you as the developer will need time to market the property to a home builder, retailer or business park tenants. In fact, you may even find yourself sinking more cash into the property in order to satisfy the needs of your prospective tenants or buyers after you thought the property was ready to go.

Subdivision vs. Cluster Development

“Cluster Development,” or conservation development, is a type of subdivision that has recently emerged and is rapidly changing the face of residential property development. Cluster developments group residential subdivision properties in a way that takes advantage of and use surplus land for open green space, recreation and even urban agriculture. This type of property development’s increasing appeal and use stems from the move towards more low impact and sustainable “green building.” As an alternative to conventional subdivisions, cluster development also differs from Planned Unit Developments, which usually contains a mix-use of residential, commercial, industrial or retail.

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