Predevelopment

What Is Predevelopment?

Predevelopment is the stage of a real estate project between the first idea and the closing of construction financing. During this phase a developer figures out whether a project can work and gets it ready to build. Nothing is under construction yet, but a great deal of money and time is spent.

The phrase also describes the costs of this phase (“predevelopment costs”) and the loans that pay for them (“predevelopment loans”).

How It Works

Predevelopment usually includes:

• Site control. Securing the land through a purchase option, a contract, or a lease.
• Feasibility. Studying the site, the market, and the numbers, often including a market study, surveys, soil tests, and environmental reviews.
• Design. Hiring an architect and engineers to produce plans that can be priced and permitted.
• Approvals. Obtaining zoning, land-use, and building approvals.
• Financing. Applying for tax credits, public loans, and grants, and lining up a construction lender and investors.

Rules for the federal HOME Investment Partnerships Program show what lenders treat as predevelopment. HOME funds can be lent to nonprofits certified as community housing development organizations for feasibility studies, consulting, legal, architectural and engineering fees, options to buy property, site control, and title clearance. A second type of HOME loan, called a seed money loan, covers later costs such as architectural plans, zoning approvals, and securing a firm construction loan commitment. Both are repaid from construction loan proceeds or other project income. The state or local government that made the loan can waive repayment if the project is blocked by obstacles reasonably beyond the borrower’s control.

Nonprofit lenders offer similar products. CSH (the Corporation for Supportive Housing), for example, makes early-stage predevelopment loans once a developer has a team, a project concept, a financing plan, a schedule, and an identified site. It also makes late-stage loans for the permitting, design, and other work a construction lender requires before closing.

Why Predevelopment Is Hard

Predevelopment money is the riskiest money in a project. If the site fails a test, a zoning vote goes the wrong way, or a funding application is denied, much of what was spent may never be recovered. Conventional lenders are often unwilling to lend at this stage. Developers rely instead on their own cash, foundation grants, mission-driven lenders such as community development financial institutions, and public programs.

Why It Matters for Workforce Housing

Affordable and workforce projects often need several funding sources, each with its own deadlines and award cycles, so their predevelopment can stretch longer than a comparable market-rate project’s. Smaller nonprofit and community-based developers feel this most, since they have less cash to put at risk. Shortening this phase is one goal of reforms like by-right development, which removes discretionary approval votes for projects that meet the rules.