Commercial real estate developers find properties and add value to them. They might be retail, office, or apartment buildings, or even subdivisions. They might fix them up or add new amenities, for example. These developers work on a large scale that requires a high degree of technical and practical knowledge.
The commercial real estate development business can be lucrative, but it can also be difficult. Especially if you’re new to it.
To illustrate the complexities, consider a couple examples.
Let’s say a developer finds a warehouse that's falling apart near a hip neighborhood in a medium-sized city. Because of its proximity to the city, he or she believes the warehouse would make a cool incubator for food-related startups. The warehouse is 12,000 square feet. It costs $500,000 to purchase, but it needs $1 million in improvements to make it suitable for tenants.
When the project is complete, the property will be worth $2.5 million. The developer can earn income by collecting rents from tenants, which he or she will find through a commercial broker. Along the way, the developer comes across zoning and regulatory hiccups that result in a lengthy due diligence and construction period of two years.
In another instance, a developer buys a 30-acre parcel of land for $10 million. He or she converts the zoning to accommodate 600 townhomes and hires architects, lawyers, and engineers to conduct feasibility studies. The developer hires a contractor to build those townhomes.
When they're complete, he or she sells them for $250,000 each. That results in $150 million in pre-construction revenue. After construction and selling expenses of $120 million, that's a $20 million profit.
Escrow, zoning conversion, permitting, and construction can take years. That’s not to mention the financial risk the developer takes on to get financing.
There are several ways to get into the commercial real estate development business. The best way for you depends on your skillset and willpower. In all commercial real estate development transactions, many players must work to make the deal happen.
Here are a few ways you can become one of those players:
Become a commercial real estate agent or broker
Commercial real estate agents make money on leases and sale transactions.
Commercial leases are often structured as triple net. That means that the tenant pays rent plus the owner’s property taxes, insurance, utilities, and maintenance costs. The leases are generally longer, sometimes 10 years or more, and the commercial agent’s commission is based on the total amount of the lease.
Take this scenario: A commercial broker secures a medical practice tenant for an office building. The rent will be $25,000 per year, and the lease is for 10 years, for a total value of $250,000. The commercial broker charges a 5% commission, which is $12,500. This commission may be split with the tenant’s broker, so each would receive $6,250.
In exchange, you might help your client negotiate their lease and navigate legal hurdles to get the tenant in the space.
Selling commercial real estate can earn bigger commissions than in residential real estate. But deals may take longer to close. If you sell a 20-unit apartment building for $2 million with a 5% commission rate, that’s a $100,000 commission split between you and the other party’s broker. It takes many years, hours of networking, and a lot of know-how to close these types of transactions. They're more complex and have long due-diligence periods.