Pre-Development Budget & Schedule (Pursu

Pre-Development Budget & Schedule (Pursuit Costs & Timeline)

Pre-development is a term used by developers to describe development activities before the start of construction. I have always thought the word “pre-development” was a bit of a misnomer. The activities a developer performs during "pre"-development are the core of development. Those activities are typically a lot more important, complex, and difficult than overseeing the construction and turning over the completed building. Pre-development is the hard part. It's where you determine if you have a viable project or not, where you formulate your plan, overcome your biggest obstacles, and establish how much money you're going to make. Pre-development can take years, and usually takes longer than the construction. Your overall development schedule should list your pre-development tasks and timeline, and your development checklist should include your pre-development activities.

Pre-development activities have costs associated with them, called pursuit costs. A developer should quantify the dollar amounts of those pursuit costs and forecast when they will have to be paid so he can be sure he will have enough money to continue with the project pre-development activities until loan closing. Below is a list of typical pursuit costs:

Land purchase earnest deposited with escrow company
Conceptual site design
Conceptual building design
Conceptual interior design
ALTA survey (with topography survey)
Environmental survey
Geotechnical survey
Travel costs
Legal fees
Market study
Traffic study
Architectural schematic design
Permit fees
Lender origination fees

All of the above costs are things the developer has to pay for out of pocket, before they close on their bank loan and limited partner equity. Those costs can easily run in excess of $1 million dollars on a large development. To forecast when those dollar amounts have to be paid out, you can do up a simple spreadsheet with your pre-development period laid out in months along the top, and your pre-development costs listed down the side. I provide an example here. This forecasting tool is useful because it tells you what month you will have to pay what dollar amount.

When you first have the idea for a development, you don’t know if the project is going to be feasible or not. You have to do a lot of costly and time-consuming investigation to see if it will be a viable project. Sometimes you can afford to fund those pursuit costs out of pocket. But sometimes you don’t have the cash, or don’t want to take on all the risk of paying for the pursuit costs for a project that may or may not make it. You can decrease that risk and your pursuit costs by bring on a capital partner or co-developer to help pay for some of those pursuit costs. Of course that means if the project is successful, you are going to have to share some of your profit with that capital partner or co-developer.

If you do bring in a co-developer, or early limited partner to help fund the pursuit costs, you are going to want to formalize that agreement in a pursuit cost sharing agreement. I provide an example pursuit cost sharing agreement here.

Next Page: Pre-Development Meeting with the City