Funding Pre-Development Costs

One of the most challenging aspects of real estate development is spending money before it is even clear whether or not a deal is viable.

Search costs, legal expenses, inspections, surveys, permitting fees, and more can all be incurred before a developer even knows whether or not a potential deal will pencil. So for real estate developers operating deal-by-deal, these expenses must come out of pocket, putting up a significant barrier to getting started as a real estate developer.

Fortunately, there are now more options than ever for upstart developers looking to ease the burden of pursuit costs. Today’s letter will tackle those financing options with a deep dive look into the tradeoffs of how developers cover pursuit costs. Specifically, we’ll cover:

• Typical pursuit costs and the barrier they represent;
• Capitalization options available for pursuit costs, including platform investors, seller financing, predevelopment loans, and grants and incentives;
• Tradeoffs of the various approaches;

Macro implications and impact on the housing market.