Funding Pre-Development Costs

Developers have more options than ever to capitalize early deal expenses. Here's why that matters.

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.