Development Inputs
Model Assumptions
- Construction interest uses 50% draw factor (average outstanding balance, simple interest, no compounding)
- Loan base = LTC% × (Hard + Soft) only — land typically funded by equity
- Completed value = Stabilized NOI / Exit Cap Rate (direct capitalization)
- All costs assumed at t=0 (simplified); completed value discounted from stabilization date
- No TI, leasing commissions, or lease-up carry modeled separately
- No phasing, option value, or dynamic construction cash flows
For educational purposes. Not financial advice. Market conventions simplified.
Feasibility Results
Value & Cost Summary
Land Feasibility
Development Returns
Time & NPV
Formula Breakdown
Understanding Real Estate Development Feasibility
What is Residual Land Value?
Residual land value is the maximum a developer can pay for a site and still achieve their target profit margin. It answers the fundamental development question: "Given what I can build here and what it will cost, how much can I afford to pay for the land?"
The calculation works backwards from the completed property value, subtracting all development costs (including the developer's required profit) to arrive at the amount left over for land acquisition. This "back-door" approach is standard in real estate development analysis (Geltner Ch. 28).
Residual Land = Completed Value − [Total Cost excl. Land × (1 + Profit Target%)]
Dev Spread = (Completed Value / Total Cost) − 1
Dev Yield = Stabilized NOI / Total Cost
NPV = PV(Completed Value) − Total Cost
Development Spread & Yield Explained
Development spread (profit on cost) measures total return relative to investment: if the completed property is worth $42M and total costs are $28M, the spread is 50%. Developers typically target 15–25% to compensate for construction and lease-up risk.
Development yield (yield on cost) compares stabilized NOI to total cost. If your development yield exceeds market cap rates for comparable stabilized properties, you are effectively "creating" value by building rather than buying. For example, a 9% development yield vs. a 6% market cap implies significant value creation.
Construction Interest Mechanics
Construction loans are drawn progressively as work is completed — the full balance is never outstanding from day one. This calculator uses a 50% draw factor to approximate the average outstanding balance, assuming roughly linear draws with simple interest.
In practice, actual interest depends on the specific draw schedule, compounding frequency, and whether the lender charges an interest reserve. For detailed construction budgeting, use a monthly draw schedule rather than this screening approximation.
NPV for Development Projects
Development NPV discounts the completed property value back to today at a development discount rate (typically 15–20%) and subtracts total costs. The discount rate is higher than a stabilized property's cap rate because development involves operational leverage: fixed construction costs amplify uncertainty in the final property value (Geltner Ch. 29).
Feasible vs. Not Feasible
Feasible Project
Land cost below residual value, positive NPV, development yield exceeds market cap rate, spread above 15–20%. The project creates value and compensates for development risk.
Not Feasible
Land cost exceeds residual, negative NPV, thin spread, or yield below market cap rate. The developer is paying too much, building too expensively, or the market cannot support the required rents.
Frequently Asked Questions
Disclaimer
This calculator is for educational purposes only and provides a simplified static feasibility screen. It is not a substitute for a full development pro forma or discounted cash flow analysis. Actual development decisions should consider detailed construction budgets, phased draw schedules, lease-up carry costs, TI/LC allowances, entitlement risk, and local market conditions. Consult a qualified real estate professional or financial advisor for investment decisions.
