Regulatory Delays, Not Costs, Pose the Biggest Threat to Small Developers

Written by:

Rudi Davis

Date:

12 Feb 2026

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Standard underwriting models often miss a critical vulnerability in small-scale multifamily development: regulatory requirements imposed late in the project cycle can inflict far more damage than the exact costs incurred earlier. These late-stage delays disrupt project economics, threaten developer confidence, and can even render projects unviable.

James Smithmeyer, founder of JMJ Contracting and Development, has seen firsthand how timing outweighs cost for small projects. While a $75,000 compliance cost can be absorbed in a large 60- or 100-unit development, it becomes significant for a 20-unit project; Smithmeyer emphasizes that timing is even more critical. A modest regulatory cost, if paired with a lengthy approval delay at the end of construction, can fundamentally alter a project’s outcome.

The Real Cost of Delays at the End

Smithmeyer points out that delays near completion are especially damaging. By the end of construction, all capital is deployed, construction interest is accruing, and tenants are often lined up to move in. Developers are also seeking to secure permanent financing or start their next project. A regulatory hurdle that adds even two or three months to this phase doesn’t just increase direct costs. It also compounds interest payments, postpones lease-up and rent collection, and delays conversion to long-term financing.

For example, a three-month delay at the end of a 20-unit project means three more months of interest payments on the whole construction loan, three months of lost rental income, and a longer wait to refinance or access new capital. These indirect costs can quickly surpass the direct expense of the regulatory requirement itself.

Missed in the Models

Most development pro formas treat compliance costs as predictable line items — fees, permits, or upgrades — without accounting for the risk and compounding effect of late-stage regulatory delays. According to Smithmeyer, this is a structural blind spot. The timing of regulatory friction is rarely modeled, leading to systematic underestimation of project risk in jurisdictions with complex or unpredictable approval processes.

This oversight is especially acute for small-scale projects. Significant developments can spread both cost and time risks across more units and provide a financial cushion to weather delays. Small projects lack these buffers, making them far more vulnerable to late-stage regulatory surprises.

Why Small Developers Have No Margin for Delay

Smithmeyer argues that small projects in high-cost regions like the Northeast can often absorb moderate cost increases. Developers can budget for reasonable professional fees and construction management costs within the project’s economics. However, they cannot absorb regulatory delays or uncertainty that emerge late in the process. A $10,000 regulatory change that brings a three-month delay near project completion can jeopardize the entire project.

The impact isn’t just financial. Smithmeyer notes that repeated late-stage delays erode developer confidence and willingness to take on future projects. “It also really breaks down the confidence people are going to have, and then, hence, are less likely take risks on those projects in the future,” he says.

Unintended Consequences: Who Bears the Burden?

Well-intentioned regulations for safety, environmental standards, or community benefit often impose disproportionate burdens on small developers. Smithmeyer explains that in counties like Westchester, a 20-unit project faces the same compliance infrastructure as a Manhattan megaproject but without the resources to absorb delays or influence the process. The result: small developers who fill critical housing gaps in secondary markets are forced to take on risks they can’t hedge, while larger players can weather the uncertainty.

“If there are too many hurdles, that becomes not viable,” Smithmeyer says, highlighting how cumulative requirements, each seemingly minor, can collectively threaten a project’s feasibility.

Rethinking Risk for Capital Allocators

For investors and capital allocators, Smithmeyer’s experience points to a blind spot in current underwriting practices. Standard models typically treat regulatory costs as fixed expenses rather than as variable risks with potentially significant timing impacts. Smithmeyer recommends that family offices and other capital sources “revisit the entitlement process” and pay closer attention to zoning and approvals, not just as costs but as sources of unpredictable delay.

As regulatory requirements continue to expand in the Northeast, driven by climate mandates, safety upgrades, and community benefit policies, the ability to model and price regulatory timing risk will become increasingly important. Developers who understand and anticipate the compounding impact of late-stage delays will be better positioned to deliver projects on time and on budget. At the same time, those who ignore timing risks may find their economics upended by factors that models failed to anticipate.

Looking Ahead: The Need for Predictability

The current environment makes clear that for small multifamily developers, regulatory predictability is more valuable than low compliance costs. Policymakers and capital providers who seek to increase the supply of small-scale housing must focus on streamlining and clarifying late-stage approvals, rather than merely reducing fees or requirements.

In a market where every month of delay can erase already-thin margins, the actual cost of regulation isn’t just in dollars; it is in lost time and lost opportunity. It’s in lost time and lost opportunity. For small developers, that difference can determine whether projects move forward or stall indefinitely.