Real estate underwriting and development models

A development scheme spends for two years before it earns anything. The question that decides whether the deal works is not the exit value; it is how much equity sits outstanding at the worst month, what that equity costs, and whether the facility is still in covenant when it happens. None of that is visible in an annual model.

Cost and programme

Land, hard costs, soft costs, professional fees and contingency are laid against the construction programme month by month. Hard costs follow an S-curve rather than a straight line, because that is how a contractor draws. Contingency is a visible line that depletes, so early consumption is an alarm rather than a footnote discovered at practical completion.

Delay is modelled as a switch, not as a separate workbook. A six-month programme slip pushes revenue, extends interest, defers the refinance and moves the exit into a different market. Sponsors are often surprised how much of the IRR that single variable owns.

Revenue and absorption

For-sale schemes run on unit-level absorption with reservation, exchange and completion timing, deposits, and sales and marketing costs deducted where they fall. Rental schemes run on lease-up by unit type with free rent and concessions, building to a stabilised operating statement with realistic vacancy, bad debt and a reserve for replacement that lenders will insist on anyway.

Yield on cost against exit cap rate is the spread that determines whether development risk is being paid for. Where that spread is under 100 basis points, the model says so on the summary tab rather than leaving it to be inferred.

Debt and covenants

The senior facility draws against actual cost, capitalises interest during construction, and charges commitment fees on the undrawn balance. Mezzanine sits behind it with its own economics. Loan-to-cost, loan-to-value, debt yield and DSCR are tested every month, with the first breach period flagged explicitly. A refinance at stabilisation is sized off stabilised net operating income and the takeout lender's constraints, because for a hold strategy those proceeds are the return.

The waterfall

Preferred return accrues and compounds on the correct unreturned-capital base; catch-up is tested each period; promote crystallises only when the tier above is genuinely met. A waterfall that pays promote early will be found by investor counsel, and that discovery costs the relationship rather than a formula.

Where underwriting already exists, a model audit is usually the fastest route to committee. Where it does not, the development model build covers cost, revenue, debt, waterfall and sensitivity as one workbook.