# The value chain from raw land to stabilized operation
A flat 20-acre soybean field on the edge of a growing suburb might sell for a few hundred thousand dollars as farmland. Twenty-four months later, the same dirt, now covered by 250 leased apartments, could be worth tens of millions. Nothing about the physical earth changed. What changed was the sequence of risks somebody took, and the rights somebody attached to the land.
That sequence is the real estate value chain. Understanding it tells you where money is made, who makes it, and where deals quietly die.
Raw land is cheap for a reason: you usually cannot build what you want on it yet.
Entitlement is the legal process of getting government approval to develop land a specific way. It covers zoning (the rules dictating what can be built where, such as "residential" versus "commercial"), density limits, height, parking, and environmental review.
Our soybean field is zoned agricultural. To build apartments, the developer must get it rezoned, win site plan approval, and clear environmental and traffic studies. This can take 12 to 36 months and involves public hearings where neighbors show up angry about traffic.
Here is the key insight: the biggest single jump in value often happens here, before a shovel touches ground. Land that is "entitled" (approved for its intended use) is worth far more than raw land, because the buyer no longer carries the risk that approval never comes.
Where deals die: A city council vote goes the wrong way. A wetland is discovered. A neighborhood association sues. Entitlement risk is binary and political, which is why some firms specialize only in this stage, then sell the approved parcel and walk away.
The American Planning Association offers plain-English explainers on zoning if you want to go deeper.
Approvals in hand, the developer needs money. Almost no one builds with cash alone.
A typical deal has two layers:
The developer, called the sponsor or general partner (GP), typically contributes a small slice of the equity but earns outsized returns if the deal works, through a structure called the promote or carried interest. Passive investors, the limited partners (LPs), put in most of the equity and take a preferred return first.
Lenders care about one ratio above all: loan-to-cost (LTC), the loan divided by total project cost. A bank lending 65 percent LTC wants the sponsor and LPs to absorb the first 35 percent of any loss.
Where deals die: Interest rates rise and the projected rent no longer covers debt payments. This is exactly what stalled many projects across 2023 and 2024 as borrowing costs climbed. A deal that "penciled" (worked on paper) at 5 percent debt can be dead at 8 percent.
Now the physical work. The developer hires a general contractor (GC), who manages subcontractors: excavation, framing, plumbing, electrical, and finishing.
Two numbers dominate this stage:
1. Hard costs: the physical building (materials, labor).
2. Soft costs: architects, engineers, permits, legal, financing fees, and insurance.
Value is created here by execution, not magic. Delivering on time and on budget preserves the margin. Blowing the schedule destroys it, because the construction loan accrues interest every month the building sits unfinished and unleased.
Where deals die: Cost overruns. Supply chain delays. A subcontractor goes bankrupt mid-job. Labor shortages, which have pressured construction timelines across many US markets in recent years, stretch schedules and burn the interest reserve.
🎬 [VIDEO: "How Commercial Real Estate Development Works" — youtube.com — a clear walkthrough of the development process from land to lease-up]
The building is done. It is also empty, which means it produces zero income while still owing debt. This is often the most nerve-wracking phase.
Lease-up is the period of signing tenants until the property hits stabilization, an industry benchmark occupancy level (commonly cited around 90 to 95 percent) at which the asset is considered a reliably operating business rather than a speculative bet.
For our 250 apartments, lease-up might run 12 to 18 months. The developer offers concessions (a month of free rent, waived fees) to fill units fast, because empty units earn nothing and time is expensive.
Value here is created by proving the rent. A signed lease at the projected rate converts a forecast into a fact. Each lease de-risks the asset.
Stabilization is the finish line for the developer and the starting line for the long-term owner.
A stabilized property has a proven income stream, so it can be:
Buyers value income property using the capitalization rate (cap rate): net operating income divided by price. If a building throws off 2 million dollars of net income a year and similar assets trade at a 5 percent cap rate, it is worth roughly 40 million (2 million divided by 0.05). Lower cap rates mean higher prices, and vice versa.
This is why the same building is worth dramatically more stabilized than half-leased: the buyer no longer prices in the risk that the rent will not show up.
Vérification des acquis
1. Why is raw land typically much cheaper than entitled land, even when the physical dirt is identical?
2. What best explains why some firms specialize only in the entitlement stage and then sell the approved parcel?
3. The lesson describes entitlement risk as 'binary and political.' What does this characterization primarily imply for a developer?
4. Select ALL correct answers. Which of the following are ways an entitlement deal can 'quietly die' according to the lesson's reasoning?
Sélectionnez toutes les réponses correctes.
5. Select ALL correct answers. Which statements accurately reflect the concept of the real estate value chain as presented?
Sélectionnez toutes les réponses correctes.
The building is full, refinanced, and humming. Now it is a business that must be run.
Property management covers the daily operation: collecting rent, maintenance, leasing vacant units as tenants leave, budgeting, and vendor contracts. Managers typically earn a fee of roughly 3 to 5 percent of collected revenue for residential assets, though this varies by property type and size.
The core operating metric is net operating income (NOI): rental income minus operating expenses, before debt payments and taxes.
NOI = Gross rental income - Operating expenses
Note what is excluded: the mortgage. NOI measures the property's performance independent of how it was financed, which lets buyers compare assets on equal footing.
Value at this stage is created two ways:
1. Raising income: pushing rents to market, cutting vacancy, adding fee income (parking, pet rent, storage).
2. Cutting expenses: renegotiating contracts, reducing utility waste, improving retention so you re-lease fewer units.
A dollar of new NOI is not just a dollar. At a 5 percent cap rate, one extra dollar of annual NOI adds about 20 dollars to the property's value. This is why operators obsess over small operational improvements: they multiply.
Where deals die (slowly): Deferred maintenance, sloppy management, and rising expenses (insurance premiums, in particular, have surged in many US markets) can erode NOI. A property does not usually collapse here; it just underperforms, quietly destroying the returns investors were promised.
The value chain rewards different players for taking different risks:
The pattern: value is created every time a specific risk gets removed. Whoever removes that risk captures the reward.