Terms specific to ground-up development and construction deals — from land acquisition through stabilization.
- Hard Costs
- The physical construction costs: foundation, framing, MEP (mechanical/electrical/plumbing), finishes, site work, and any other costs tied directly to the building itself. Typically the largest line item in a development budget.
- Example: A 10-unit storage facility with $800,000 in hard costs includes site prep, concrete pads, steel buildings, doors, and paving.
- Soft Costs
- Non-construction costs that are still required to get the project built: architecture, engineering, permits, legal fees, surveys, environmental studies, and inspections. Usually expressed as a percentage of hard costs (10–20% is typical).
- Example: On an $800,000 hard-cost project, 15% soft costs = $120,000 for plans, permits, and professional fees.
- Contingency
- A budget buffer for unexpected cost overruns during construction. Expressed as a percentage of hard costs. 5–10% is standard; anything below 5% is aggressive for a new developer.
- Example: 10% contingency on $800,000 hard costs = $80,000 set aside for surprises.
- Carry Costs
- Monthly costs you pay during the construction period when the project produces no income: property taxes, insurance, utilities, and loan payments on the land. These add up quickly on long builds.
- Example: $3,000/month in carry costs over a 12-month build = $36,000 in holding costs before any income.
- Construction Loan
- A short-term, interest-only loan that funds the construction phase. The lender disburses money in draws as work progresses. Loan-to-cost (LTC) ratios of 65–80% are typical. At completion, you refinance into a permanent loan.
- Loan-to-Cost (LTC)
- The construction loan amount divided by total construction costs. An 80% LTC means the lender funds 80% of hard + soft + contingency costs, and you bring 20% equity plus all other costs (land, carry, etc.).
- Example: $920,000 total construction costs × 80% LTC = $736,000 construction loan.
- Development Yield(Yield on Cost)
- Stabilized NOI divided by total development cost. This is the development equivalent of cap rate — it tells you what return the project produces on every dollar spent to build it. Higher is better.
- Example: $120,000 NOI ÷ $1,500,000 total development cost = 8.0% development yield.
- Development Spread
- Development yield minus the market cap rate (exit cap rate). This is the profit margin for taking on construction risk. A positive spread means you're being compensated for building instead of buying. Aim for 1.5–3%+.
- Example: 8.0% development yield − 5.5% exit cap rate = 2.5% development spread.
- Exit Cap Rate
- The expected capitalization rate at which you could sell (or refinance) the completed, stabilized property. Lower exit cap = higher sale price. This is the market benchmark your yield is compared against.
- Example: If stabilized NOI is $120,000 and exit cap is 6%, the implied value is $120,000 ÷ 0.06 = $2,000,000.
- Exit Cap Sensitivity
- A measure of how much your property's estimated value changes when the exit cap rate shifts by a small amount (typically +0.5%). Because value = NOI ÷ cap rate, even a half-point cap rate increase can cause a large dollar drop in value — especially on higher-NOI projects. DealForge's Risk Radar flags this when the value loss exceeds 8–15% of total development cost, signaling that your profit margin is fragile and you should stress-test exit assumptions.
- Example: At a 6% exit cap, stabilized value is $2,000,000. At 6.5%, it drops to ~$1,846,000 — a $154,000 loss from just a 0.5% cap rate shift.
- Lease-Up Period
- The time between construction completion and full occupancy. During lease-up, income ramps from near-zero to stabilized levels. Longer lease-up means more carry costs and delayed returns.
- Example: A 20-unit apartment building might take 6–12 months to fully lease up after construction.
- Stabilization
- The point at which the property reaches its projected occupancy and income levels. Most lenders require stabilization (typically 90%+ occupancy for 90 days) before refinancing into permanent debt.
- SBA 504 Eligibility
- An SBA 504 loan can finance owner-occupied commercial real estate with as little as 10% down. To qualify, at least 51% of the building's square footage must be occupied by the owner's business. Great for mixed-use development where you operate a business on-site.
- Example: A 10,000 SF building where your business uses 6,000 SF (60%) qualifies for SBA 504 financing.
- Income Source
- A type of rentable space within a development project. Mixed-use developments may have multiple income sources — e.g., ground-floor retail, upper-floor apartments, and storage units — each with different rent, unit counts, and vacancy assumptions.
- Equity Multiple
- Total distributions (cash flows + sale/refi proceeds) divided by the total equity invested. A 2.0x equity multiple means you doubled your money. This metric captures the full return over the entire hold period.
- Example: $500,000 equity invested, $400,000 total cash flow, $700,000 from sale proceeds = ($400K + $700K) ÷ $500K = 2.2x equity multiple.
- Profit on Cost(POC)
- Stabilized property value minus total development cost, divided by total development cost, expressed as a percentage. This is the developer's profit margin — the return earned for taking on construction and lease-up risk. A positive POC means the project created value.
- Example: ($2,000,000 stabilized value − $1,500,000 total cost) ÷ $1,500,000 = 33.3% profit on cost.
- Profit on Sale
- The net gain from selling a completed development: sale price minus total development cost minus selling expenses (broker commission, transfer taxes, etc.).
- Example: $2,000,000 sale price − $1,500,000 total cost − $120,000 selling costs = $380,000 profit on sale.
- Value Created
- Stabilized value minus total development cost. Shows the raw dollar value a development project created above and beyond what was spent to build it. This is the development equivalent of instant equity.
- Example: $2,000,000 stabilized value − $1,500,000 total cost = $500,000 value created.
- Cost Per Unit
- Total development cost divided by the number of rentable units. Another way to benchmark construction costs across similar project types.
- Example: $1,500,000 total cost ÷ 50 storage units = $30,000/unit.
- Total Development Cost
- The all-in cost to develop a project from raw land to stabilized income: land acquisition + closing costs + entitlement + hard costs + soft costs + contingency + carry costs + construction loan interest. This is the denominator for development yield and profit on cost.
- Total Equity Required
- Total development cost minus the construction loan amount. This is how much cash the developer must bring to the table. In DealForge, equity required = total cost − (construction costs × LTC ratio).
- Example: $1,500,000 total cost − $736,000 construction loan (80% LTC) = $764,000 equity required.
- Stabilized Value
- The estimated market value of a development project once it reaches stabilized occupancy, calculated by dividing stabilized NOI by the exit cap rate. This is the number your development yield and profit metrics are benchmarked against.
- Example: $120,000 stabilized NOI ÷ 6.0% exit cap rate = $2,000,000 stabilized value.