What are typical predevelopment costs in real estate?

What are Typical Predevelopment Costs for Multifamily Developments?

Predevelopment costs in real estate include expenses before construction starts, including land acquisition, feasibility studies, design and engineering fees, and legal costs. Additional costs involve permitting, site surveys, utility assessments, and financing charges. These also include expenses for marketing, sales preparations, and site preparation, such as demolition, and vary widely depending on the project's scope and location.

Predevelopment costs typically include:

  1. Land Acquisition: Cost of purchasing the land on which the development will occur.
  2. Feasibility Studies: Assessments to determine the viability of the project, including market studies, environmental impact assessments, and zoning compliance checks.
  3. Design and Engineering: Expenses for architectural design, engineering plans, and blueprints.
  4. Legal Fees: Costs associated with legal counsel for real estate transactions, zoning issues, and contract development.
  5. Permitting and Approvals: Fees paid to local or regional authorities for obtaining necessary permits and approvals for construction.
  6. Site Surveys and Soil Testing: Costs for surveying the land and testing the soil for suitability, which can impact the design and construction approach.
  7. Utility and Infrastructure Assessment: Expenses related to assessing and planning for utilities and infrastructure needs, such as water, sewage, electricity, and internet connectivity.
  8. Project Financing Costs: Charges and fees associated with securing financing for the project, including loan origination fees and interest during the predevelopment phase.
  9. Marketing and Sales Preparations: Costs for marketing strategy and sales preparations, especially in residential or commercial developments where pre-sales are necessary.
  10. Demolition and Site Preparation: If existing structures need to be removed or the land needs significant preparation, these costs are also considered part of predevelopment.

These costs can vary widely based on the scope and location of the project and are critical to budget for in the early stages of a real estate development project.

Example of Multifamily Predevelopment Costs

For a $50 million multifamily development deal, the predevelopment costs might include:

Land Acquisition

The cost of purchasing the land could be a significant portion of the budget. For example, if the land accounts for 25% of the total project cost, this would be $12.5 million.

Feasibility Studies

This might cost around 1-2% of the total project cost, so between $500,000 and $1 million.

Design and Engineering

These services can also range from 1-2% of the total project cost, resulting in another $500,000 to $1 million.

Legal Fees

These could be around 1% of the project cost, which would be approximately $500,000.

Permitting and Approvals

This might cost around 0.5-1% of the total project cost, so about $250,000 to $500,000.

Site Surveys and Soil Testing

This could be around $100,000 to $200,000.

Utility and Infrastructure Assessment

This might cost around $100,000 to $300,000.

Project Financing Costs

For a project of this scale, the financing costs could be around 1-2% of the total project cost, which would be $500,000 to $1 million.

Marketing and Sales Preparations

This could cost around 0.5-1% of the project cost, or $250,000 to $500,000.

Demolition and Site Preparation

This can vary greatly, but might be around $500,000 to $1 million.

These are rough estimates and can vary based on the location, complexity of the project, market conditions, and other factors. The actual percentages can fluctuate based on specific circumstances and the efficiency of the project management.

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