Private Equity’s Role in Real Estate Development & Construction

01 February 2019
Architecture Blue Building

Private equity and real estate development have been partners for years - collaborating to fund major development projects all over the world. Without private equity firms, many real estate development projects would not be possible.

In the construction industry, private equity firms provide the necessary funds to get a project from start to finish. These firms play a huge role in real estate development and have a larger influence than you may initially think. Here we’ll present to you just how big of a role these firms play in developments and how the whole process works.

How Construction Focused Private Equity Works

Real estate development is not a cheap process. The entire project as a whole can cost anywhere from 1 million to 100 million dollars. In almost all cases, development firms don’t have the cash to fund projects of this size upfront. That’s when development firms turn to private equity firms and banks.

Usually, a bank will cover a large sum of the costs but leaves about 20-35% for the developers to fund. In some cases, that 20-35% could be millions of dollars, so most likely a development firm will seek out additional help funding this portion. This is where private equity comes into play.

A private equity firm oftentimes invests their money into real estate development projects to complete funding on these projects. Although, they may not cover the entire final cost, leaving about 3% for the development firm to fund.

The Role of Private Equity Within the Construction Industry

Architecture Blue Sky Building

If a private equity firm is choosing to invest in a development, they play a huge role in the decision-making process. They have a lot more power than some initially think.

Part or Majority Owner

First and foremost, the private equity firm investing in the development will be considered a majority or part owner of the property. Since they are funding a large portion of the project, they are entitled to a large amount of ownership of the project. Overall, the development firm is indebted to the private equity firm.

Large Influence in Major Decisions

Since the private equity firm is considered a part owner of the development, they have a large influence in the decision-making process. They will have input in many decisions throughout the development process. The level of involvement the firm has depends on their preference and how much they have invested.

Overall, private equity can have an impactful influence on the construction and real estate development industry. For more information on the inner workings of real estate development, reach out to Focus today!

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