third, the developer must be able to reconcile the objective facts of the project—“the pieces of the puzzle”—with the vision or “mystery” of what he or she is going to do with it. “On the one hand, you must consider all of the physical characteristics of the property—the sewer, water, soil capacity, topography, etc. On the other hand, you must be looking at potential uses, product type, absorption rates, and what you would do with the property if you had it. For example, the highest and best use for a piece of property may be retail shops, but you must ask yourself whether there is really a market for that product. When you have those two sets of information on the table then you can make a decision about whether you want to pursue this property or development project or not.”
But more important than reconciling these two sets of information is reconciling what Fogelson calls “the subconscious voice and the conscious voice.” “You may lay a set of facts on the table, look at them consciously, and it all makes sense and adds up but if it doesn’t feel right in your gut—if you instinctively have reservations about it—then don’t do it. On the other hand, if your inner voice tells you ‘Boy, this is the greatest thing since sliced bread’ but you can’t make it work with the objective facts, then you shouldn’t do it then either. You should not go ahead with any deal until your inner voice and your outer voice are in harmony because if you do, you will decrease your chances of being right.” But there is a better reason for waiting until the inner and outer voices are in harmony, says Fogelson. “The chances are, you will run into problems, and when you do, if your inner voice had doubts, then it will say to you, ‘See, I told you not to do this,’ and, now, when you have got to have that extra conviction required to push through and do it, it won’t really be there, because you will be thinking, ‘I should have listened in the first place.’”
Like orchestra conductors and movie producers, developers are generalists who bring a lot of other people together to create something. “And at the end of the day,” says Fogelson, “when you put together a development you have to think about all of the people who are going to be around the table—the architect, the land planner, the construction people, the marketing people, the finance people, and all of the others. They are all coming at things from their own perspective or point of view, pushing for what they think is going to be best for the project based upon their own role or persuasion. But the developer is the one who is sitting there at the head of the table, and he has to sort through all of the information and all of the voices and make a decision.”
Gerald Fogelson’s story acts as a bridge between the stories of Beacon Hill and Evanston, showing how long-range vision and tenacity together can shape a place. His summary of the traits required of a developer is just one opinion but in this case, as in all of the stories that follow, his words, views, and ideas closely reflect those of many other developers. Indeed, while each of the stories in this book illustrates specific ideas, in fact the similarities between developers and their stories far eclipse their differences.
Real estate development is an entrepreneurial pursuit, and the qualities that Fogelson describes as being critical to his success—vision, persistence, and tenacity, along with his obvious self-confidence and optimism—are the qualities required of any successful entrepreneur. In the next chapter we will go back to the beginning and look more closely at ideas about the entrepreneur—from the origin of the word itself and the personality traits entrepreneurs have in common to how they think about making money and how they use social and political skills to carry out their work.
Chapter 2
Deal Makers
Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage.
—Victor Kiam, American entrepreneur1
Entrepreneurs and Entrepreneurship
Rather than working for other people and earning a salary in an established business that makes a marginal profit, real estate developers seek to create and sell entirely new products in the hopes of earning a much larger entrepreneurial profit. They do this by purchasing property, construction services, and professional services—the project costs—and combining them together into a new product that can be sold for a price that is greater than the sum of those costs. The difference between the total cost and the price is the entrepreneurial profit.
This is not as simple as it sounds. Not everyone has the risk tolerance to try it, and of those who do try, not all succeed. Many successful developers, however, seem to have certain traits in common. People who work closely with developers often describe them as visionary, creative, open-minded, optimistic, persistent, tenacious, and charismatic. Developers use these traits, their ample interpersonal skills, and their social, political, and business connections to structure a series of arrangements with individual landowners, consultants, contractors, elected officials, community members, and other interested parties. Then they assemble these many and varied arrangements into a single real estate development project or “deal.”
Table 1. Profit = Sale Price Less the Sum of Costs
Note: This table shows how entrepreneurial profit can vary widely. In the first, pro forma version, if everything goes according to plan, the developer can expect to earn a healthy 15 percent profit. If the developer can successfully raise prices 15 percent, then profit doubles to 30 percent. If, on the other hand, prices drop just 10 percent, then the developer’s profit drops to 5 percent or just one-third of the original pro forma profit. If prices drop 15 percent or more, profits disappear and the developer’s invested capital is at risk.
Because deals are the basic product of entrepreneurial behavior, this chapter will consider how economists, geneticists, and sociologists think about “the entrepreneur” and the field of entrepreneurship. I will discuss their observations about the entrepreneur’s role in the economy, why some people are genetically predisposed to entrepreneurial behavior, and what entrepreneurs really do on a day-to-day basis—the social and political work they engage in as a part of doing deals. I summarize these characteristics through a portrait of the entrepreneur and then introduce a Chicago developer whose career story illustrates and brings these ideas to life. First, let’s begin with the basic character of the entrepreneur.
The Economist’s View
In his 1942 classic Capitalism, Socialism, and Democracy, the economist Joseph Schumpeter equated the capitalist entrepreneur with medieval warlords and generals from the Napoleonic era. For these men, “generalship meant leadership, and success meant the personal success of the man in charge, who earned corresponding profits in the form of social prestige.” The nature of warfare at the time—before mechanized armies—meant that the individual decision-making ability and driving influence of the leading man, including “his actual presence on a showy horse,” were essential to success in the strategic and tactical implementation of warfare. So too for the entrepreneur, says Schumpeter.2
This militaristic metaphor may seem extreme but in fact the word “entrepreneur” has military roots. In their book about successful business people, From Predators to Icons, the French sociologists Michel Villette and Catherine Vuillermot traced the origins of entrepreneurship to thirteenth-century France. Then, the noun “entreprise” meant a military action and the verb “entreprendre” meant “to attack a person or a castle for pillage or to take prisoners for ransom.” By the early eighteenth century, “entrepreneur” had come to mean an individual who engaged in risky economic behavior by relying on a self-interest-based strategy and by using skills and trickery to achieve his objectives.
