How a multifamily development deal works, stage by stage

A private development deal is a sequence, and the documents describing one assume you already know it. Capital is called at closing, and then a series of stages happens to it — entitlement, buyout, vertical construction, delivery, lease-up, stabilisation, exit — each named in the paperwork without being explained. This is that sequence, in order. Metropolitan Holdings develops, builds, and manages what it owns, so the stages below are described from inside them.

Site control and entitlement

Nothing begins until the land is controlled, and control usually means an option or a long diligence period rather than ownership. The developer is buying time: the right to acquire the site while finding out whether it can carry the project — whether sewer can reach it, what the grade and the floodplain take out of the buildable ground, and how many homes the shape of the parcel actually holds.

Most of what it is finding out is entitlement — the public process by which a municipality decides what may be built. Zoning, a rezoning or variance where the code does not fit, a planning commission hearing, often a council vote, and the conditions attached to approval. Which of those a project needs is decided by the zoning already sitting on the parcel, and it is worth establishing early, because a compliance review, a vote by an elected body, and a negotiated planned district are three different risks rather than three names for the same one. Around it sit the studies that decide whether the approval is worth having: survey, borings, environmental review, traffic, utilities.

Projects die at this stage, and little has been spent when they do, which is the point of doing it first. It is also the stage that rewards being local: relationships with land owners, municipalities, and trades decide whether a site gets entitled on schedule.

Design, budget, and the buyout

An estimate is not a price. It becomes a price through buyout: sending the completed construction documents to subcontractors, taking bids trade by trade, and awarding contracts. A budget line that has been bought is a contract with a number in it. A line that has not is a forecast.

So the number worth knowing is how much of the budget is bought rather than estimated. Our construction services page puts ours in the firm’s own words: at loan closing our plans and specs are completed and ready for the teams out in the field, and we strive to have 75% bought out at loan closing. Strive is the honest verb, and the share still open is real exposure.

Loan closing and the capital stack

A development is financed with a stack: the construction loan takes the least risk and is repaid first; equity from the sponsor and its investors takes the most and is repaid last. Where our own two funds sit in that stack — one lending, one owning — is set out line by line in the published fund terms. The loan does not arrive as a lump sum: it funds in draws against work already in place and inspected.

Two pieces of the stack explain much of what happens later. The first is the interest reserve — borrowed money set aside to pay the loan’s own interest during construction, because an unfinished building produces no income to pay it with. The second is the guarantees: a construction loan is normally recourse to the sponsor through a completion guarantee, and often a repayment guarantee.

Closing is what the first half of the sequence points at: equity is called, the loan is recorded, the guarantees are signed, and the schedule starts counting against a completion date.

Vertical construction

“Vertical” is the industry’s word for the part a visitor would recognise as building. It follows site work — clearing, grading, utilities, and the roads and pads the buildings sit on — which is where the surprises live, because it is where you find out what is underground.

Above ground the sequence is fixed. Foundations, framing, roofing, envelope, then mechanical, electrical, and plumbing rough-in, an inspection at each gate, then insulation, drywall, and finishes. Each trade waits on the one before it, so a framing crew three weeks late does not cost three weeks: it costs three weeks plus whatever the next four crews were promised to somebody else meanwhile.

Payment terms matter here. Our construction and finance teams work together to pay subcontractors within 30 days of pay application. A subcontractor paid on a predictable cycle staffs the job that pays predictably. This is also the stage where a sponsor that builds its own projects finds out about a problem directly rather than in someone else’s report.

Certificate of occupancy and lease-up

A certificate of occupancy is issued when a structure may lawfully be occupied, and on a community of several buildings it is issued building by building. How many separate certificates that means depends on what is being built: a community of homes built at once and run as one property delivers small structures many times over, across a longer calendar than a stacked building does. So the first buildings open months before the last is finished, and residents move in while the far end of the site is still under construction.

Two things follow. Income starts before construction ends, which is why a development budget carries an operating deficit line. And the earliest residents lease into a construction site, which is the honest reason concessions exist. Where shops sit beneath the apartments, the two halves of the building fill on separate calendars, and the commercial income arrives long after the residential income does.

Lease-up is measured against absorption: the number of homes the model assumed would lease each month, at what rent, with what concession. Leasing behind the model lengthens the period in which the reserve is paying the loan and the equity is waiting.

Stabilisation

Stabilised is a condition, not a date. It normally means physical occupancy at or above a stated level, held for a stated number of consecutive months, and the definition sits in the loan agreement and the operating agreement rather than anyone’s judgement. The two do not always agree.

It matters because it triggers what follows. A lender will not refinance on a projection and a buyer will not price an asset on one; both price in-place income. Until the property produces it the project is a plan; once it does, it is a number other people will underwrite.

Refinance or sale

A construction loan is short-term by design and has to be repaid or replaced — by permanent financing, or by a sale.

Permanent financing is sized off the property’s stabilised income, the interest rate available on the day, and the lender’s own coverage and proceeds tests. The rate at refinancing was not knowable at loan closing years earlier, and a loan sized on the same income at a higher rate supports less debt — which decides whether a refinancing returns capital in full, in part, or not until a later event. A sale puts the same question to a buyer instead.

The two routes also differ in tax. A refinancing is not a disposition, so it neither releases suspended passive losses nor triggers recapture. A fully taxable disposition of the entire interest to an unrelated party does both, and those conditions do real work: a fund that sells one property out of several has not necessarily disposed of an investor’s entire interest in the activity. That chain is worked through in why development produces paper losses, and our after-tax calculator compares the two exit routes with figures attached.

Where your money sits at each stage

• Before closing. The land is under contract while the project is entitled, designed, and bought out. Whether investor capital is exposed here depends on the structure.
• At closing. Capital is called. From that point it is committed and illiquid, and there is no public market to sell the position on.
• During construction. There is nothing yet to collect rent on. Interest is paid out of the reserve, and because interest on property with a long production period is generally capitalised into basis rather than deducted, these are not the years that produce the deduction people expect.
• Through lease-up and stabilisation. Buildings are placed in service as they open, which is when depreciation begins and when the K-1 typically starts reporting a loss. Distributions can begin once cash flow supports them and the loan permits.
• At refinance or sale. Capital comes back, in whole or in part, on whatever terms are available at the time.

Fees run alongside all of it, attached to stages rather than arriving as one number at the end: a development fee across construction, a contractor’s margin as work is put in place, a management fee on collected revenue once there are residents, an asset management fee through the hold, and at exit a disposition fee and the sponsor’s promote. Where each is paid from — the construction budget, operations, or sale proceeds — decides whose dollars it comes out of, and the operating agreement rather than the summary says which.

What the schedule does to the outcome

Every stage above is also a date, and the dates compound. A project that finishes late finishes into a different interest rate and a different leasing season than the one it was underwritten against, which is why construction cost and schedule head the list of things that actually determine the outcome. It is also why ground-up work differs from buying an occupied building: our communities are new construction rather than value-add acquisitions of older stock, trading renovation risk for construction and lease-up risk. The two strategies diverge on where the return is meant to come from, when cash flow starts, and what the debt looks like.

Development involves substantial risk, and every stage carries its own: an entitlement refused or conditioned in a way that changes the project, construction delay and cost overrun, a lease-up behind the model, interest-rate and refinancing risk when the construction loan comes due, leverage, illiquidity throughout, and loss of principal. No return is guaranteed; a target quoted from an offering document is a target and not a guarantee, and nothing here predicts how a project will turn out. What can be examined in advance is how a sponsor runs each stage, and what it does when one slips. One stage missing its date rarely stays one problem, and the chain it starts — an overrun, a delayed delivery, a lease-up behind the model, a refinancing on worse terms — arrives in that order.

Our communities map marks the ones not yet open as coming soon, and the about page sets out which stages are run in house. To ask about a specific community, start with investor relations or put the question to our team.