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Development Budget

 

The development budget is one of the most important documents for a development project.  It is the main input to your proforma, and your proforma is what tells you if the project will be financially feasible or not. 

 

As mentioned on the page where I discuss the development manager's typical roles and responsibilities, the development manager doesn't typically assemble the proforma.  This is typically covered by the development team's financial analyst and built in Excel.  While proformas are beyond the scope of and not further detailed on this website, it's important to note that the proforma's most important input, an accurate development budget, is the responsibility of the development manager. 

 

Below are some of the line items that should be include in a project's development budget.  Start by itemizing out every cost you can think of on your budget.  This will lead to more accurate pricing, and help confirm all costs covered.  Don't just lump several costs into one broad category line item, otherwise you are asking for trouble because you will likely miss something by not itemizing in great detail.  Itemize, itemize, itemize.  Even if one of the below line items does not apply to your project, or has no cost, leave it as a line item and attribute a zero dollar amount to it.  This reminds you, and lets others know, that you have considered this cost.  Reach out to consultants, contractors, vendors and city officials to get proposals or budgetary pricing for each of the below line items based on your project's scope of work.  As that scope is clarified and matured, get actual pricing that can become the contract price for that line item. 

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Land & Hard Costs

  • Land Cost

  • Building Construction Costs.  This will by far be the biggest line item in the budget.  Focus a lot of your time and effort on getting this cost accurate by closely managing the bidding/pricing process with your GC(s).

  • Landscape Allowance.  Landscaping usually doesn't get decided upon, designed, and priced out until very late in the project.  Because of that, developers usually just carry an allowance for budgeting purposes.  Also, it's relatively easy to design a landscaping package to hit a specific allowance. 

  • Tenant Improvement Cost/Allowance

  • Furniture, Fixtures & Equipment (if any provided by developer)

  • Hard Cost Contingency.  This is typically in the 3.5% - 5% range for the total of all hard costs, less the land cost. 

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Soft Costs

  • Market Analysis Fees

  • Architect Fee

    • Architect Design Fee

    • Architect Reimbursable Allowance​

    • MEP Design Fee

    • Structural Design Fee

    • LEED/Green Consultant Fee

    • Tenant Improvement/Interior Design Fee

    • Commissioning

  • Civil Engineering Fees/Due Diligence

    • Entitlement Assistance

    • Zoning Attorney

    • Platting

    • Civil Design Fees​

    • SWPP Design

    • ALTA Survey (w/ or without topo)

    • As-built ALTA Survey

    • Wetland Survey

    • Construction Staking

    • Tree Survey

  • Impact Fees/Utilities/Permits

    • Roadway Impact Fees​

    • Traffic Study Fees

    • Water/Sewer Impact Fees

    • Public Park Impact Fees

    • Police/Fire/EMS Impact Fees

    • Electrical Tap & Transformer Fees

    • Gas Connection Fee

    • Tele/data Service Connection Fee

    • Building Permit Fee

    • Demolition Permit Fee

    • Site Development Plan Permit Fee

    • Foundation Permit Fee

    • SWPPP Permit Fee

    • TI Permit Fee

  • Low Voltage

    • Data cabling

    • IT Closet Infrastructure

    • Access Control​

    • Surveillance Cameras

    • Security Alarms

    • Audio/Visual (especially TVs/digital display boards)

    • Telephone System

  • Signage​

    • Exterior Building Signage​

    • Monument Signage

    • Wayfinding Signage (exterior and interior)

    • Interior Marketing Signage

  • Construction Materials Testing

  • Geotech Survey & Report

  • Environmental Site Assessment

    • Phase I​

    • Phase II

    • Asbestos Survey (if renovation)

    • Asbestos Abatement (if needed)

  • Lender/Equity Inspector Fees.  A bank will usually hire a 3rd party construction inspector to ensure that the amount being charged on the GC's pay app matches the work in place.  To estimate this line item on your development budget, ask your bank who they will use for these inspections, and reach out to them to get an estimated cost per inspection.  Multiply that inspection costs by the number of months in your construction schedule since this inspector will probably visit the project site monthly, in alignment with your monthly draw request submissions to your bank. 

  • Property Taxes During Construction

  • Legal Fees

    • Title Review​

    • Purchase & Sale Agreement/Ground Lease 

    • Development Agreement

    • Limited Partnership/Syndication Agreement

    • Design Contracts

    • Construction Contract

    • Lender Documents

    • Tenant Leases

  • Insurance. This line item is for any general liability business insurance for your development company, that a lender might require.  The general contractor and designers will carry insurance for construction and design in their pricing. 

  • Travel.  These are travel costs for the development manager, and other members of the development team to periodically visit the project.  To estimate this line item, take the typical airfare, rental car, hotel, and meal expenses for one trip to the project site, and multiply that by how many visits the development manager (and any other development team members) will make to the site - which is usually once or twice a month during the construction duration, and probably 2 - 3 trips after construction for punch list and other closeout visits. 

  • Development Fee

  • Real Estate Broker Commissions

  • Soft Cost Contingency.  This is usually in the 3.5% - 5% range of the total of all soft costs to cover any underbudget or unforeseen soft costs. 

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Financing Costs

  • Title Insurance Policy

  • Appraisal & Appraisal Review Fees

  • Lender Origination Fees

  • Land Carry.  If you have to buy your land site before you close on your construction loan, and if you take out a loan to buy that land, budget money here to service the land loan debt before you close on your construction loan.  The construction loan will usually take out your land loan. 

  • Construction Period Interest.  Most construction loans are interest only during the construction period, and you budget money here to service that interest payment while under construction.  This interest-only construction loan usually converts into an amortizing loan sometime after construction, or you have to refinance to take out the construction loan and replace it with a traditional amortizing loan.  Your construction period interest costs are difficult to estimate with accuracy because there are several hard to forecast variables that drive your interest costs.  Those variables are: how much of the bank loan you are drawing each month, when you are drawing those loan funds, and what the floating interest rate will be during the construction period.  A quick and dirty formula to estimate your construction period interest is to multiply your loan amount by your current annual interest rate, divided by 12 months/year, multiplied by your construction duration in months, multiplied by 50%.  The Excel formula would look like this: [loan amount]*[interest rate]/12*[number of months for construction]*50%.  The 50% multiple at the end of the formula averages out the total debt drawn, which is 0% at the start of construction and 100% at the end of construction. 

  • Capital Procurement Fee.   There are brokers who specialize in finding capital for developers for development deals.  If you hire one of them to help you find equity investors and bank loans, that broker is going to want a fee for his services. 

  • Credit Enhancement Fee.  If the general partners/sponsors of the development do not have the balance sheet to guarantee the loan, they might need to bring in a high net worth partner to help guarantee the loan.  Usually, that high net worth partner wants a fee for putting a part of his balance sheet at risk to guarantee the loan. 

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Sharing the Development Budget with the Bank and LP Equity

Even though I emphasis the importance of itemizing out every little costs you can think of in your development budget to make sure you don’t miss anything, this isn't the version of the budget you want to share with your bank or limited partner equity investors.  As a developer, you want the liberty to reallocate funds from one line item to another.  The dollar amounts you have in each line item are just estimates.  You will inevitably have some line-item costs that go over budget and some that come in under budget.  You want to be able to reallocate a surplus in one line item to cover cost overages in another line item.   

 

Lenders don't like to see you reallocating savings in one line item to cover a cost overage in another line item.  They will start asking why there is a cost overage in a line item.  If you have to ask the bank’s permission every time you want to reallocate savings from one line item to an overage in another line item, it is just going to be a painful and slow process and impede your efforts to effectively and timely manage the development. 

 

If you show the bank a version of the development budget that only has a handful of broad category line items, you can move money around between the sub-category line items, while still being within budget on the broad category line items.  For example, in the budget items I have listed above, I have a broad category line item called "Impact Fees/Utilities/Permits," but I have 14 sub-category line items below it.  If I had a large $40,000 bust in my Roadway Impact Fees sub-category line item, but if I can pull together $40,000 of savings from the other 13 sub-category line items, I'll still be within budget for the broad category line item and the bank won't question it. 

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Next Page: Assembling Your Team

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