I tried same thing but still we are getting error as:
"Failed to create database "Development Storage" : User does not have permission to perform this action.
One or more initialization action failed. The development storage can not be used without performing this action."
Hi, does your account have proper rights to create a new database? If not, grant them.
You can test this with sql enterprise manager. Just log in with window authentication, and try to create a new database.