lev-os Analyzing Development Feasibility
Evaluates real estate development projects by building a ground-up cost model, projecting stabilized returns, stress-testing key assumptions, and delivering a go/no-go recommendation with supporting metrics.
When To Use
- Sponsor or LP requests underwriting of a proposed ground-up development or major redevelopment
- Comparing multiple development sites or project configurations for capital allocation
- Assessing whether a land parcel justifies its asking price given highest-and-best-use development
- REIT or fund evaluating a development pipeline addition against return hurdles
- Lender reviewing a construction loan request for feasibility sign-off
Inputs To Gather
- Site information: location, zoning designation, lot size, FAR/density limits, entitlement status [VERIFY zoning against local code]
- Program: proposed unit mix or rentable SF by type, parking ratio, amenity scope
- Land basis: purchase price or contributed value, closing costs, carry assumptions
- Hard cost budget: construction cost per SF or per unit (specify CSI level of detail available), contingency percentage
- Soft costs: architecture/engineering, permits/fees, legal, development management fee, interest reserve
- Construction timeline: pre-development months, construction duration, lease-up/absorption period
- Revenue assumptions: market rents or sale prices per SF/unit, escalation rate, vacancy/collection loss at stabilization
- Operating expenses: projected per-SF or per-unit OpEx, real estate taxes [VERIFY local mill rate], insurance, management fee
- Capital structure: equity/debt split, construction loan terms (rate, fees, interest reserve), permanent financing assumptions
- Return hurdles: target unlevered IRR, levered IRR, equity multiple, yield-on-cost, development spread
Workflow
Validate inputs and flag gaps — Confirm all cost and revenue line items are present. Mark missing data with [VERIFY]. Check that zoning allows the proposed program (density, height, use type). Confirm entitlement status and timeline risk.
Build the development budget — Organize costs into land, hard costs, soft costs, and financing costs. Calculate total development cost (TDC) on an absolute and per-SF/per-unit basis. Compare hard cost estimates against relevant benchmarks (e.g., Marshall & Swift, recent comps). Apply contingency (typically 5–10% hard, 3–5% soft) and confirm adequacy.
Project stabilized NOI — Model gross potential revenue using the unit mix and market rents. Deduct vacancy/credit loss (typically 5–7% for multifamily, varies by product type [VERIFY]). Subtract operating expenses to arrive at stabilized NOI. Calculate yield-on-cost (stabilized NOI ÷ TDC) and compare to prevailing market cap rates to determine the development spread.
Construct the cash flow pro forma — Map monthly or quarterly draws against the construction and lease-up timeline. Model construction loan interest accrual (simple interest on outstanding balance). Capture lease-up trajectory with realistic absorption (units/month or SF/quarter). Run the pro forma through stabilization and, if a hold scenario, through a defined investment horizon (typically 5–10 years).
Calculate return metrics — Compute unlevered and levered IRR, equity multiple, peak equity requirement, and profit margin (residual value minus TDC as % of TDC). For sale scenarios, apply a terminal cap rate to stabilized NOI to estimate residual value and deduct disposition costs. Sensitivity-test IRR against ±10–15% swings in rents, construction costs, and timeline.
Assess risk factors — Evaluate entitlement/permitting risk, construction cost escalation exposure, absorption/lease-up risk, interest rate risk on floating-rate construction debt, and exit cap rate sensitivity. Flag any single-variable swing that moves IRR below the target hurdle.
Benchmark and recommend — Compare yield-on-cost and development spread to recent comparable projects and to acquisition alternatives. State whether the project clears return hurdles under base, upside, and downside scenarios. Provide a clear go/no-go recommendation with stated conditions (e.g., "proceed contingent on GMP contract below $X/SF").
Output
Deliver a structured feasibility report containing:
- Executive summary: one-paragraph recommendation with headline metrics (TDC, yield-on-cost, development spread, levered IRR, equity multiple)
- Development budget: line-item breakdown with per-SF and per-unit columns
- Pro forma summary: annual NOI projection through stabilization, key revenue and expense assumptions
- Returns analysis: base case IRR/multiple plus sensitivity table (rent, cost, timeline axes)
- Risk matrix: top 5 risks ranked by probability and impact, with mitigants
- Comparable benchmarks: 2–3 recent comparable developments with cost and return metrics
- Conditions and open items: list of [VERIFY] items and recommended next diligence steps
Quality Checks
- Yield-on-cost exceeds prevailing market cap rate by at least 100–200 bps (if not, flag as thin spread) [VERIFY market cap rate]
- TDC per SF/unit falls within reasonable range for product type and market — outliers require explanation
- Construction timeline aligns with local permitting norms and contractor availability [VERIFY]
- Sensitivity table covers at least three variables with meaningful swing ranges
- All assumptions sourced — no unsupported round numbers for rents, costs, or cap rates
- Interest reserve in the budget matches the modeled construction loan interest accrual
- Equity multiple and IRR are internally consistent with the cash flow pro forma (no formula errors)
- Peak equity draw timing is identified so the sponsor can plan capital calls