Acquisition, Development, and Construction of Real Estate
Investments in real estate projects require significant amounts of capital. For real estate properties that are developed and constructed, rather than purchased, project costs include the costs of tangible assets, such as land and other hard costs (sometimes referred to as “bricks and mortar”); intangible assets and other soft costs, such as architectural planning and design; and interest and taxes. Costs are often incurred before the actual acquisition of the project, which raises certain questions—for example, from what point in time should costs be capitalized? What types of costs are capitalizable?
Determining what types of costs to capitalize in the preacquisition, acquisition, development, and construction stages of a real estate project has been an issue for many years. Several decades ago, in reaction to significant diversity in practice, the American Institute of Certified Public Accountants (AICPA) issued this accounting guidance related to cost capitalization:
Industry Accounting Guide, Accounting for Retail Land Sales, issued in 1973
Statement of Position (SOP) No. 78-3, Accounting for Costs to Sell and Rent, and Initial Rental Operations of, Real Estate Projects, issued in 1978
SOP 80-3, ...