Ronald L. Pelfrey, et al of Newborn, to Twin Dune Estate LLC of Santa Rosa Beach, Fla., 1101 Shiloh Road, 33.39 acres, Newborn, $157,000. • Wilmington

Why did Jared Kushner pay so much for the 666 Building in Manhattan?

Because he was betting on the fact that the building was in a prime location, but was designed for a different era. Once he took control, he completely rebuilt the entire first couple of floors, creating a retail condominium that he then sold for a record price, and began plans to demolish the existing building and construct what would likely be one of the most expensive new mixed-use projects ever developed in New York City.

Left, the existing building with the new retail; Right, the plan for the new building.

Until the deal fell apart a couple of weeks ago for political reasons, he was about to sell a large part of the building to a Chinese investor who would have financed the new project. Even though that deal is now dead, there remains the possibility that someone more politically acceptable will come along and replace them.

The New York Times has just published a detailed chronology and breakdown of the project and its financing which shows how high the stakes are in a real estate deal like this. The market in Manhattan has cooled since Kushner made the original purchase, and they have had to go through extreme contortions to keep the project alive. Depending on how things turn out, this could be either a stunning success cementing Kushner’s status as a world class real estate developer, or a very expensive failure costing the Kushner family hundreds of millions of dollars.

But that is the nature of highly leveraged, entrepreneurial real estate development, as I discussed in David S. Rose’s answer to How is becoming a billionaire even possible, chronologically? It is a trade-off between extreme financial risk and extreme financial reward, and the entrepreneurs who do this as a career often oscillate (careen?) between billionairedom and bankruptcy. Donald Trump himself has had companies he owned, with his name on them, go bankrupt six times (the leaked tax return showed him taking a billion dollar loss in a single year) but although he is nowhere as rich as he claims, it seems likely that at the end of the day he is still at least a legitimate billionaire personally.

Another case in the news this week is that of New York billionaire developer Harry Macklowe, who has had a similar up-and-down, highly controversial career (not dissimilar from Trump’s). He is currently engaged in a bitter divorce from his wife of 57 years, with one of the major issues being who actually controls his $2 billion fortune. That’s because he put most of it in his wife’s name when he went through bankruptcy because of a similar problematic real estate deal just a few blocks away from Kushner’s and Trump’s: the GM building that is home to the flagship Apple Store.

It is important to understand that real estate development is not just about the availability of money. There is an enormous amount of money available for real estate investment in New York City, even though today the average mega project costs over a billion dollars to build, and the market—as Kushner is finding—is currently softening. But there is no guarantee that any particular project will achieve its projected sales or rental prices years in the future. As such, real estate development is truly the epitome of high-stakes, high-leverage entrepreneurship, betting on visions that other people don’t necessarily see or agree with.

In fact, Donald Trump got his start as a developer by purchasing the run down Commodore Hotel in New York City, during a major real estate recession in the city, and forming a partnership with Hyatt to invest $100 million to rebuild it into the Grand Hyatt. That property could have been bought by anyone else, including dozens of major New York real estate developers, none of whom had the foresight and risk tolerance to make the bet. But when he eventually pulled it off, he was launched on his way to everything that has happened since then.

Similarly, a few years later the Bing & Bing portfolio of 29 luxury rental apartment buildings in Manhattan was put up for sale, and many of the city’s leading building owners and developers bid on the package. It was ultimately sold to developer Marty Raynes, who paid over $250 million for properties whose rent rolls barely broke even, and were occupied by large numbers of rent controlled and rent stabilized tenants who could not be evicted or have their rents raised.

Everyone else was taken aback by the sales price, because although everyone had counted on converting the buildings to cooperatives and selling the units, no one could figure out how any conceivable sales price could justify the quarter of a billion dollar purchase price.

The answer became clear when the first thing that Raynes did after taking over the properties was to build new triplex penthouse apartments on top of the existing buildings, utilizing their unused development rights. The profits from those new, unregulated, luxury units more than made up the difference in the purchase price that he had been willing to pay.

Could that have been done by any other of the dozens of major developers who had bid on the projects (including me)? Sure. Did they see it? No. That’s what development is all about.