How does the Developer get paid, and when?

[Tiara Murray]

I had another quick question. I was wondering how else a developer gets paid from a real estate development, other than selling ownership. I was reading about Donald Trump and how he was paid management and construction fees to oversee the development. But how exactly does this work? Who cuts the check to Trump? For example... If I wanted to do a mixed use development in downtown chicago and I structured financing via bank loans and private investors, and I'm scheduled to break grown within one month... how exactly would I get paid during the contruction of the building? Also, since Trump is the CEO of his own company, does he just cut himself a check, or does his partners pay him?

[Jon Holdman]

A company would be formed. Investors would put money into the company. That's not Donald's money, its the company's money.

Donald could be both an investor an an employee. CEO's are usually both. They could get paid multiple ways.

One is just their paycheck. Like all the other employees, they get a check every two weeks or whatever. If the company is of any significant size, they would have a payroll department, or would outsource payroll to a company like ADP.

Second is dividends or distributions from their stock. When a company is building up, such as a high tech startup when its trying to grow, or a real estate developer as they're doing the building, there would not typically be any distributions. Once the units were built and were being old, however, the company might make distributions of the profits to the share holders. If the company was formed specifically to build one building or do a specific deal, when its finished, any remaining money, both original contributions and profits, would get distributed back to the owners.

When a group of people forms a company, and sells of shares in the corporation (or uints in an LLC), they often keep some for themselves. Bill Gates, for example, kept a lot of Microsoft stock for himself as they were doing their public offerings. So, even though the founders of a company may not put in much money, they may end up with owning a significant chunk of the company.

Large corporations are controlled by a "board of directors". There is a chairman, and a group of directors. Ultimately, they make the decisions about the company, and the CEO executes those decisions. So, even CEOs have bosses. The board of directors can, and very often does, give the CEO, other executives and sometimes even employees, various sorts of bonuses. Sometimes in cash, sometimes as stock options or restricted shares. Now, in reality, the same person is very often the CEO and the chairman of the board of directors. So, that same person could recommend to the board to give himself a big bonus, get the board to approve it, and collect the money.

The Donald is not going to be cutting checks. An accounting or payroll department would do that. In a small LLC, its is possible.

I think for the most part, people who start and run large development projects aren't worried about collecting a weekly paycheck. They have money, or else they wouldn't be starting projects like this.

Trump Entertainment, Donald's company that owns casinos in Atlantic City, filed bankruptcy on Feb 17. You don't really think that means he's personally broke :-).

Now, there are small companies, or even individuals who build individual houses. I've spoken with several at our REIA. They're really not very different than fix-and-flippers. They just do more work. The find a lot, build a house, sell it, and get paid. They either use their own money, or they get financing from a bank, or have a money partner. But, just like a fix-and-flipper, or a wholesaler, they get a paycheck at the end of the deal.