The First Dollars In: Modeling Pursuit Capital In Real Estate Deals

At the outset of every compelling real estate venture, before architects sketch their visions and contractors pour concrete, there’s a quiet but powerful player setting the stage: pursuit capital. This early-stage funding powers the riskiest and most uncertain phase of a deal, when entitlements are in limbo, designs are in flux, and site control is still a handshake away.

As modelers and dealmakers, we often obsess over the intricacies of the GP-LP waterfall. But how often do we pause to ask: How is pursuit capital actually treated in our model? Is it simply refunded? Buried in acquisition costs? Or should it stand apart as a signal of who truly took the first risk?

In this post, we explore how pursuit capital interacts with Co-GP structures, influences the waterfall, and can significantly shape financial outcomes. We’ll tackle the mechanics, the strategy, and the best practices for modeling this critical (and often misunderstood) capital.

What is pursuit capital, and who puts it up?

Pursuit capital is the money spent before a project is even a project. It covers zoning studies, site plans, legal fees, due diligence, and more, all without any certainty of closing. It’s the “first check in” and often the “first at risk.”

These dollars usually come from the Co-GP or a close-knit group of high-trust investors willing to bet on the sponsor’s ability to get to the starting line. Because of the risk, pursuit capital isn’t just about getting reimbursed. Those who contribute typically want a meaningful stake in the upside their early risk helped create.

The Co-Gp Layer: Where Pursuit Capital Lives

Before LPs join the party, the Co-GP team has already invested time, energy, and capital. In modeling terms, pursuit capital often precedes formal equity rounds and therefore presents unique timing challenges.

Some modelers address this by splitting equity contributions into two tranches:

1. Pursuit Equity: Early dollars from the Co-GP to fund pre-development work.
2. Development Equity: Funds contributed once entitlements or permits are secured.

Alternatively, a cleaner model may use logic-based triggers to stagger contributions along a single timeline. While this keeps the model tidy, it requires more precise tracking of when funds are deployed and returned.

Where Pursuit Capital Shows Up In The Waterfall

Here’s where things get nuanced. In the Co-GP waterfall (the mini waterfall between the sponsor and early investors), pursuit capital is a key input. It represents the first capital at risk and often earns both a preferred return and a promote.

Once the institutional LP comes in, the GP’s equity contribution includes this pursuit capital. From the GP-LP perspective, it’s treated as part of the GP’s total contribution and gets repaid through the standard waterfall structure.

In other words, from the GP–LP’s lens, the pursuit capital is just part of the GP’s total equity. The LP doesn’t see its structure, only that the GP has contributed its share. Internally, the Co-GP waterfall handles the details.

Now, in the Co-GP waterfall, it’s tracked as an equity contribution. In the GP–LP waterfall, it’s baked into the GP’s equity line item. That capital, raised from early Co-GPs. sits at risk throughout the life of the deal and represents true skin in the game.

This dual-layered, “double promote” structure ensures early investors share in both repayment and upside potential from the pursuit phase.

Double Promote Structures: Not Just For Institutional Deals

Double promote structures are not only reserved for institutional joint ventures. They’re increasingly used by entrepreneurial developers teaming up with high-net-worth individuals or family offices.

The sequence works like this:

Co-GP Waterfall: Early investors (funding pursuit capital) split returns with the sponsor, often on a simple basis (e.g., 50/50 after a preferred return).

GP-LP Waterfall: When institutional capital joins at RTI (Ready-To-Issue permits), the Co-GP, now acting as the GP, receives promote distributions based on deal performance.

That promote then “cascades back” to the pursuit capital investors through the Co-GP structure.

Imputed equity and the entitlement “lift”

Entitling land creates value. So, what happens when pursuit capital not only pays costs, but also drives this “lift” in land value?

Institutional LPs typically reimburse the cost but may hesitate to pay for unverified increases in value. As a workaround, the GP might contribute the land at an uplifted valuation into the JV. The gap between cost and value, created through pursuit efforts, is then credited to early investors.

For example, if $1M of pursuit capital lifts land value to $1.5M, that $500K gain can be treated as imputed equity. The GP can then negotiate a higher promote or reduced preferred return in exchange for bringing value to the table.

That said, how the early lift is treated is ultimately a bespoke negotiation. Think about it this way: if you are a Co-GP writing the first check during pre-entitlement risk, you wouldn’t settle for just a return of capital and a pref. you’d expect to share in the value created by that early work.

So, when the development LP enters and the land is marked up, it’s common for early investors to negotiate a share of that step-up in value, participating in the “lift” alongside the GP.

Timeline Nuance: Modeling Staggered Contributions

Given the different stages of investment (pre-entitlement vs. post-entitlement), modeling should reflect contribution timing. While two-timeline models provide transparency, many professionals prefer a unified timeline with trigger-based logic to simplify cash flow tracking.

The key is consistency. Whether modeling pursuit and development capital separately or jointly, contributions must be clearly linked to their return streams in the waterfall. Misalignment here can misstate returns and erode investor trust.

Best Practice: Three Clean Capital Raises

Whether you’re raising capital from institutional partners or family offices, it’s smart to align your raises with the natural lifecycle of the project:

1. Pre-Entitlement: Highest risk, funded by Co-GP or seed investors.
2. Development: Lower risk, institutional or structured equity joins.
3. Stabilization or Sale: Crystallize promote, recap, or sell.

Avoid raising outside of these phases. Doing so creates confusion, complicates reporting, and raises red flags for investors.

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Behind The Model: Real-World Case In Structuring Pursuit Capital 

Ironpoint Development Group, a Phoenix-based real estate developer, specializes in ground-up residential communities across the Southwest. In 2023, the firm identified a promising 21-acre infill site in Goodyear, a fast-growing suburb of Phoenix, ideal for a 176-unit build-to-rent (BTR) community: Desert Vista BTR.

At the time, the site was zoned for agricultural use, required a general plan amendment, and needed a rezoning application approved by the city council. No institutional capital was yet committed, and Ironpoint hadn’t secured control of the land, just a signed letter of intent with the landowner and a 120-day exclusivity window.

Pursuit Capital: The First Risk Taken

To advance the project from concept to entitlement, Ironpoint budgeted $475,000 in pursuit capital, allocated as follows:

• $125,000 for land planning, site layout, and civil engineering studies
• $100,000 in legal fees (rezoning counsel, LOI drafting, joint venture docs)
• $75,000 for traffic, soil, and environmental studies
• $50,000 in consultant fees (public relations and neighborhood outreach)
• $25,000 in internal overhead allocation
• $100,000 in refundable earnest money

This capital was funded entirely by Ironpoint’s three principals and a long-time high-net-worth investor who frequently participates in their early-stage deals. These were truly the “first dollars in,” backing the riskiest part of the development lifecycle without guarantee of success.

Modeling Pursuit Capital in the Co-GP Structure

To reward early risk-taking, Ironpoint structured the venture with a Co-GP mini-waterfall. In the underwriting model, pursuit capital contributors were treated distinctly from later equity investors:

Pursuit Equity Tranche: $475,000

Development Equity Tranche: $7.9 million, to be funded at permit stage by an institutional LP

The model used a trigger-based logic approach: pursuit equity funded pre-entitlement, and once entitlements were secured (in month 6), the LP contributed development equity, reimbursing the pursuit costs.

The Co-GP waterfall allocated returns from future promote distributions back to pursuit investors on a 50/50 basis with the sponsor, after an 8% preferred return on the $475,000. This structure ensured that pursuit investors earned:

• A return of their capital
• An 8% IRR preferred return
• 50% of the GP’s promote in the main GP-LP waterfall

This “double promote” model recognized the disproportionate risk taken early and rewarded it accordingly.

The Entitlement Lift: Imputed Equity in Play

Ironpoint’s pursuit efforts paid off: after rezoning approval, the land under LOI (priced at $3.25 million) appraised at $4.1 million as entitled multifamily land, a $850,000 uplift. The institutional LP agreed to enter the JV at the $4.1 million valuation, and Ironpoint contributed the contract (and eventual purchase) at that value.

In the model, this $850,000 gain was treated as imputed equity, credited to the Co-GP group. It boosted the sponsor’s equity basis and helped negotiate better waterfall terms from the LP, including a reduced preferred return hurdle (from 9% to 8%) due to the “value brought to the table.”

Lessons in Modeling Pursuit Capital

This hypothetical scenario highlights several key modeling takeaways:

• Separate pursuit and development equity tranches to reflect real risk stages
• Use logic-based triggers to control capital flows and ensure proper waterfall treatment
• Reward early investors not only through reimbursement but by giving them meaningful upside
• Account for land value lift as imputed equity when warranted, and reflect that in negotiations

By treating the “first dollars in” with the care they deserve, Ironpoint’s principals aligned their capital stack, secured institutional backing, and set up a structure that rewarded those who believed earliest.

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Final Thoughts: Pursuit Capital As A Strategic Lever

Pursuit capital isn’t just money; it’s a signal of conviction. Those first dollars carry outsized weight in shaping deal economics, negotiating power, and ultimately, project returns.

Smart sponsors model pursuit capital transparently, reward early investors meaningfully, and use the structure to align interests all the way up the capital stack. As the real estate capital markets become more sophisticated, understanding and properly modeling pursuit capital can differentiate true pros.