A merchant builder, also referred to as a merchant developer, is a developer that builds properties and sells them, rather than holding onto them for longer periods of time. Merchant builders often trend toward the construction of single-tenant commercial buildings, and typically build with a specific tenant in mind. After developing the property and leasing it to the tenant, a merchant builder will generally sell the property to one or more investors. Generally, the tenant will have signed a long-term, double or triple net lease, increasing the profitability of the property and thus making it easier to sell to potential investors.

In many cases, merchant builders partner with investors, who will often contribute the majority of the capital required for the deal. For instance, if a merchant builder wants to build a $5 million single-tenant property for a drug store, and can get commercial financing up to 75% LTV, they will need a down payment of about $1.25 million. Developers often contribute about 10-20% to such deals, so, with a 15% contribution, the developer will put down $187,500, the investors will contribute about $1.06 million, and the developer will have a construction loan of approximately $3.75 million.

If, at the end of the building period, the building is sold for $6 million, this would leave the developer and the investors with about $1 million in pre-tax profit after the repayment of their construction loan. In most cases, both parties will agree on preferred return for the initial equity they have invested in the project, which can be implemented in a variety of different ways. For instance, if the preferred return is 15%, the developer/merchant builder would receive $28,125, while the investors would get around $159,000. The remaining $850,000 or profit is likely to be divided more equally between the developer and the investors, with a 50/50 arrangement being somewhat common. This would provide about $425,000 in returns for both parties.

The advantages of working with a merchant builder include the ability to access capital from investors, the potential for a higher return on investment, and the ability to access commercial financing. Working with a merchant builder can provide access to capital from investors, who can contribute the majority of the capital required for the deal. This can help to reduce the amount of money the merchant builder needs to put down as a down payment. Additionally, the potential for a higher return on investment is possible, as the merchant builder and investors can agree on a preferred return for the initial equity they have invested in the project. Finally, merchant builders can access commercial financing, which can help to cover the cost of construction.

Sources:

• www.commercialrealestate.loans/commercial-real-estate-glossary/merchant-builders
• https://commercialrealestate.loans

The main risk associated with working with a merchant builder is that the tenant may not stay in the building for the duration of the lease. If the tenant vacates the building before the lease is up, the merchant builder and the investor(s) may be left with a property that is difficult to rent out. This could lead to a loss of income and a decrease in the value of the property.

Another risk is that the merchant builder may not be able to secure the necessary financing for the project. This could lead to delays in the construction process, or even the abandonment of the project altogether. In this case, the investor(s) may not be able to recoup their initial investment.

Finally, the merchant builder may not be able to secure a tenant for the building. This could lead to a decrease in the value of the property, as well as a decrease in the potential returns for the investor(s).

In order to qualify as a merchant builder, you must have the necessary capital to invest in the project, as well as the experience and knowledge to develop the property. You must also have the ability to secure financing for the project, either through a commercial loan or through investor partnerships. Additionally, you must have the ability to manage the construction process and the leasing process, as well as the ability to market the property to potential buyers.

The typical fees associated with a merchant builder depend on the specifics of the deal. Generally, merchant builders will contribute 10-20% of the capital required for the deal, and will receive a preferred return on their initial equity investment. This preferred return can be implemented in a variety of different ways, such as a fixed rate of return or a percentage of the profits. Additionally, merchant builders may receive a fee for their services, such as a percentage of the total construction costs or a flat fee.

For instance, if a merchant builder wants to build a $5 million single-tenant property for a drug store, and can get commercial financing up to 75% LTV, they will need a down payment of about $1.25 million. Developers often contribute about 10-20% to such deals, so, with a 15% contribution, the developer will put down $187,500, the investors will contribute about $1.06 million, and the developer will have a construction loan of approximately $3.75 million.

If, at the end of the building period, the building is sold for $6 million, this would leave the developer and the investors with about $1 million in pre-tax profit after the repayment of their construction loan. In most cases, both parties will agree on preferred return for the initial equity they have invested in the project, which can be implemented in a variety of different ways. For instance, if the preferred return is 15%, the developer/merchant builder would receive $28,125, while the investors would get around $159,000. The remaining $850,000 or profit is likely to be divided more equally between the developer and the investors, with a 50/50 arrangement being somewhat common. This would provide about $425,000 in returns for both parties.

The best practices for working with a merchant builder include:

• Partnering with investors who can contribute the majority of the capital required for the deal.
• Agreeing on a preferred return for the initial equity invested in the project.
• Making sure the tenant has signed a long-term, double or triple net lease.
• Dividing the profits equally between the developer and the investors.

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