Starting a development company is a lot of work.
The two main messages you’ll come across on social media about starting a development company are:
“Make money doing something else and then invest in real estate.”
and
“Don’t wait! Just start!”
As always, social media leaves little room for the nuance behind either thought.
In my experience, the practical (and better) approach is somewhere in between, and it includes a third, less-discussed strategy:
Gain relevant experience so that if you don’t know how to solve a problem, you have a trusted network to lean on.
This is an essential preface to this post because while I hope this is helpful to people in a similar spot or looking to set some milestones in preparation for opening a development shop, it would be disingenuous to suggest there weren’t a couple of decades and a lot of work that led up to this point.
This isn’t a ‘get rich quick’ industry, so naturally, this isn’t a ‘how to set up a development company in 4 easy steps’ sort of post.
These are the main things my partner and I have focused on during our first six weeks of official work.
We started this effort after months of discussing what we wanted to build and how we wanted to approach the work. We also spent considerable time looking at the market, reviewing the data, and crafting a thesis we could both stand behind.
Essentially, we had figured out the what, the who, and the how before deciding to proceed with the work.
(For the tl;dr crowd: I summarized every section with bullet points, which we used as a checklist to tackle and track all matters within each category. If you’re interested in investing with us, let us know via the form at the end of this post.)
What exactly have we been up to?
1- Corporate org chart/strategy?
This will depend on the type of projects you plan to take on and whether you will operate or sell them at the end of the development/redevelopment phase.
This is one of the few steps that I don’t recommend taking without expert advice. It’s one of those instances where a little bit of knowledge goes a long way.
This is also the first step I recommend taking once you’re ready to start because it will expose you to the legal and financial implications of the work early on.
Not understanding the cost or time it takes to set up an SPV or fund can materially affect deal underwriting. Since this will be deal-specific and can vary greatly, it’s good to have this information early on.
So, where to start?
Find counsel that specializes in what you’re looking to do.
You should have enough of a network where you know of a lawyer that does this kind of work or you know someone who can make a recommendation.
Retain counsel to assist with setting up the proper organizational structure.
Then, pay a CPA who comes well-recommended for a couple of hours of their time to review the structure counsel recommended so you can understand all the tax implications.
While setting this up incorrectly can be fixed, correcting the situation may be costlier than setting things up right in the first place, particularly when considering the potential for additional and unnecessary tax liabilities and penalties resulting from an improper setup.
Then…
If you plan to open shop with a partner or partners, you’ll also need an operating agreement for that entity, and you’ll need to figure out terms regarding life events like death, divorce, and illness.
Essentially, you’ll have to work out who owns what, what happens to the company if something happens to the partners, and how a partner can leave or sell their stake.
This series of conversations can be valuable beyond the practical legal aspects— it will force everyone to get personal and really think about what matters to them in terms of business (and life). It will also be one of the first tests of the relationship(s) because everyone must be comfortable discussing delicate but important matters with the other partners.
Since this step has an associated cost, determining the timing of incorporating the required entities is key.
So…
This is when setting up a cash flow schedule and an expense tracker is beneficial.
That exercise will also help establish some expectations regarding the cost and the speed of the work.
It’ll also open up a conversation regarding whether or not everyone is expected to contribute funds or sweat equity, how that will be accounted for in the agreements, and whether that will translate to any differences in ownership.
Org and Corporate Structure to do list:
Draft a corporate structure with counsel
Review structure with CPA
Establish operating terms with partners as needed (can skip this if solo)
Create a cash flow document comprised of costs and schedule
2-Track all expenses
This ongoing task will keep the cash flow document from the previous point up to date.
Every expense should be tracked without exception (especially when you have partners)
When tracking expenses, the main things to track are
what form of payment was used,
who paid for it, and
whether the cost is reimbursable to the project vs. whether it’s considered a company expense.
When it comes to software, saving the login information in a single secure place will also be useful when payment information needs to be updated, and new team members are potentially involved in administrative tasks.
This is particularly important if the entities and corresponding bank accounts have yet to be created when the expenses are incurred.
Typically, these expenses include software, consulting, and legal costs.
These costs can quickly surpass tens of thousands of dollars, so creating an administrative budget (which will later be implemented into the deal budget as appropriate) is critical.
Ongoing to do list:
Track all expenses
Save all login information in a secure place
3- Project-level tasks
This is the part that people think about most when they think about running a development company.
Write out your deal thesis.
Back it up with relevant data like market comps, legislative information, and any other market intel that impacts the plan.
Then, explain why you are uniquely qualified to carry out the business plan.
Set up an investor CRM.
This can be as simple as an Excel sheet or one of many free apps. The key here is that whatever method you choose lets you easily save and export contacts and add notes.
Once you pick a method, write down every person you know who can provide meaningful feedback on your thesis or who can help make introductions to investors.
Identify the team.
This doesn’t have to be detailed to the point where every vendor is identified, but a rough order magnitude understanding of all consultant costs is required.
Some projects require specialty consultants like historic tax credit or opportunity zone experts. These expenses must be accounted for.
Determine the deal timeline.
Add relevant milestones like acquisition, capital raise, design, construction, delivery, stabilization/sellout, and branding/marketing.
Thinking of this document as a management tool rather than a static document will help keep the team on track and inform different aspects of the work.
There will be many versions of this timeline that capture specific data. What you share with the construction manager will contain a different level of detail vs. what you share with investors.
Establish a deal model based on your specific strategy.
A generic model from the Internet is unlikely to provide enough detail. In addition to ensuring the model structure fits the deal strategy, you’ll also need to ensure the market inputs are complete and accurate.
Understanding all deal expenses, including the cost of the team, jurisdictional requirements, and tax liabilities, is crucial to adequate underwriting.
A ‘back of the napkin’ model can be helpful to determine whether a deal is worth looking at more closely, but more detail will be required if you’re planning on raising money, especially if the deal has an operational component that requires a clear understanding of cash flow.
Release your deal to the world.
When you start something new, you must tell everyone.
With all the information you’ve gathered up to this point, you should have enough to present your deal and your company in a compelling way.
In our case, we first focused on creating a one-page memo explaining our deal targets, who we are, and what we aim to deliver. (If you’re interested in learning more, let us know via the investor interest form at the end of this post).
The goal is to overlap the time we need to issue a full offering memo with some major capital partnership conversations. We know some of these talks will take months and may affect the details of our offering, so we’ve planned accordingly.
Development to do list:
Establish the thesis. This is all data, no vibes.
Why this asset class?
Why this market?
Why you?
Make a list of all investors
Identify and begin selecting the team
Internal
External
Draft a deal timeline
Establish a business plan based on accurate market inputs
Tell everyone/create an offering memo
4-Vision/Image/Branding
This is less about “company values” and more about intention and strategy.
Who do you want to be?
Why are you doing what you’re doing?
What is the end goal?
What is your company about?
This will help considerably when pitching your business plan. If you have a clear vision of what your team is about, that intention will shine through and affect the projects you complete and the team you build (internal and external).
Once the intention is established, it will also be easier to determine the company’s aesthetic and to what degree that matters.
In our case, design plays a significant role in what we aim to create, so any materials we issue or collateral that represents us will reflect that.
There is no right or wrong, but some thought about what matters in this respect will go a long way.
As with all other aspects that affect the work, the budget and timing of creating a coherent image should be considered, especially if the budget is tight.
Vision to do list:
Who do you want to be?
What does the brand look like?
What is the budget?
What kind of collateral do you need?
If you have established contacts and know the process, this should take 4-6 weeks.
We expect our full offering memo to be ready in 6-8 weeks from now while we continue discussing our business plan with potential major capital partners and looking at potential sites.
If you are interested in investing with us, let us know via the investor interest form below.
OR
If you have a development site with at least 40,000 buildable square feet zoned for residential use as of right in Manhattan or a good candidate for an office-to-residential conversion, let us know!
In addition to our development work in NY, MADDPROJECT provides fee development and professional project management services across the US.
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