Real estate development model
Budget, construction loan, lease-up, refinance, development spread. Build a development budget and its draw profile, fund it equity first and then with a construction loan, lease the building up to stabilisation, refinance and sell it, and say what the development spread and the levered return are.
Built in: Private equity, Investment banking
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: real estate development model.Updated 2 October 2026
Who builds it, and for whatThe model a developer, a real estate private equity fund or a construction lender builds before land is bought, and the one an investment committee approves a scheme on. It answers whether the income the building will create is worth enough more than it costs to create it to pay for the construction, leasing and market risk, which is the development spread. Lenders read the same file for the loan-to-cost, the interest reserve and the refinance that takes them out.
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| A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 | Assumptions | |||||||||||||||||||||
| 2 | $m unless stated. Area in thousand sq ft; rents and rates are annual. Quarterly periods. | |||||||||||||||||||||
| 4 | Quarter | Unit | Q0 | Q1 | Q2 | Q3 | Q4 | Q5 | Q6 | Q7 | Q8 | Q9 | Q10 | Q11 | Q12 | Q13 | Q14 | Q15 | Q16 | Q17 | Notes | |
| 5 | Timing | |||||||||||||||||||||
| 6 | Quarter number | # | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | ||
| 7 | Refinance quarter | quarter | 14 | End of quarter. Base case: Q14, stabilisation, when absorption ends. | ||||||||||||||||||
| 8 | Sale quarter | quarter | 16 | End of quarter; base case Q16. Construction (Q1 to Q8) and lease-up (Q9 to Q14) are fixed. | ||||||||||||||||||
| 10 | Development budget | |||||||||||||||||||||
| 11 | Land | $m | 12.0 | Paid at Q0. | ||||||||||||||||||
| 12 | Hard costs, total | $m | 50.0 | Total budget; drawn by quarter on the profile below. | ||||||||||||||||||
| 13 | Hard cost draw profile | % | 5.0% | 10.0% | 15.0% | 20.0% | 20.0% | 15.0% | 10.0% | 5.0% | Share of total hard costs drawn each quarter (S-curve). Sums to 100%. | |||||||||||
| 14 | Soft costs, % of hard costs | % | 15.0% | Design, permits and legal; drawn with hard costs. | ||||||||||||||||||
| 15 | Contingency, % of hard costs | % | 5.0% | |||||||||||||||||||
| 16 | Developer fee, % of hard and soft costs | % | 3.0% | |||||||||||||||||||
| 18 | Building and lease-up | |||||||||||||||||||||
| 19 | Rentable area | k sf | 200 | |||||||||||||||||||
| 20 | Absorption | % | 20.0% | 20.0% | 20.0% | 15.0% | 10.0% | 8.0% | Share of rentable area leased during the quarter. | |||||||||||||
| 21 | Market rent at completion | $/sf/yr | 40.00 | Completion is the end of Q8. | ||||||||||||||||||
| 22 | Rent growth, % a year | % | 3.0% | Annual rate, compounded quarterly from completion. | ||||||||||||||||||
| 23 | Vacancy and credit loss, % of rent | % | 2.0% | On rent from leased space. | ||||||||||||||||||
| 24 | Operating costs not recovered | $/sf/yr | 9.00 | Recurring, on the whole building from completion. | ||||||||||||||||||
| 25 | Tenant improvements | $/sf | 35.00 | One-off, per sq ft leased. Part of the development budget. | ||||||||||||||||||
| 26 | Leasing commissions | $/sf | 10.00 | One-off, per sq ft leased. Part of the development budget. | ||||||||||||||||||
| 28 | Construction loan | |||||||||||||||||||||
| 29 | Construction loan: maximum loan to cost | % | 60.0% | Of total development cost before financing. | ||||||||||||||||||
| 30 | Construction loan: interest rate, % a year | % | 7.5% | Charged quarterly at the annual rate / 4. | ||||||||||||||||||
| 32 | Permanent loan and sale | |||||||||||||||||||||
| 33 | Cap rate at refinance | % | 5.0% | Values the building at the refinance and for profit on cost. | ||||||||||||||||||
| 34 | Permanent loan: maximum loan to value | % | 60.0% | |||||||||||||||||||
| 35 | Permanent loan: minimum DSCR | x | 1.5x | On interest-only debt service. | ||||||||||||||||||
| 36 | Permanent loan: minimum debt yield | % | 8.0% | |||||||||||||||||||
| 37 | Permanent loan: interest rate, % a year | % | 5.5% | Interest only; charged quarterly at the annual rate / 4. | ||||||||||||||||||
| 38 | Exit cap rate | % | 5.3% | Applied to forward NOI at the sale. | ||||||||||||||||||
| 39 | Selling costs, % of sale price | % | 1.5% | |||||||||||||||||||
| 40 | Exit cap rate sensitivity increment | % | 0.5% | |||||||||||||||||||
Select a cell to see its row, its schedule and the type of cell. Font colours: blue for inputs, black for formulas, green for links to other sheets. Scroll sideways to see every period.
Download
Real estate development model: the workbook
Excel workbook with working formulas, no macros and no external links. Work with it above first; it is the same model as the preview.
What the base case says
- Total development cost
- $86.4m
- Yield on cost
- 6.8%
- Development spread
- 1.6%
- Profit on cost
- 36.0%
- Levered IRR
- 18.8%
- Equity multiple
- 1.8x
- Permanent loan binding constraint
- Loan to value
Read from the workbook as served, every input at its default. Periods: Q0, Q1, Q2, Q3, Q4, Q5, Q6, Q7, Q8, Q9, Q10, Q11, Q12, Q13, Q14, Q15, Q16, Q17. The figures are invented and move with whatever you type in.
What this model is
A quarterly model of a ground-up office development: land, a construction budget drawn on an S-curve, equity and a construction loan, lease-up, a refinance at stabilisation and a sale on forward NOI.
The main output is the development spread: yield on cost less the exit cap rate. It measures the margin available to compensate for construction, leasing and market risk.
Used to test how absorption, rent, hard costs and the exit cap rate affect yield on cost, refinance proceeds and levered returns.
Seats: Private equity, Investment banking.
Careers that do this work: infrastructure & real assets, private equity, equity research, asset management.
How the schedules connect
Every row in the workbook is tagged with the schedule it belongs to; the inspector above shows the tag when you click a row. These are the schedules this model is made of and where each one lives.
Development budget and draw profile
Land, hard and soft costs, contingency, fee, S-curve
Assumptions, rows 6–8 · Assumptions, rows 11–16 · Budget, rows 6–15
Construction funding
Draws, interest during construction, fees, equity
Assumptions, rows 29–30 · Funding, rows 6–9 · Funding, rows 12–21
Lease-up and stabilisation
Absorption, occupancy, NOI, TI and commissions
Assumptions, rows 19–26 · Budget, row 11 · Lease-up, rows 6–8 · Lease-up, rows 11–16
Loan sizing: LTV, DSCR and debt yield
The lender lends to the tightest of three constraints
Assumptions, rows 33–37 · Exit, rows 5–13
Development returns and spread
Yield on cost, development spread, profit on cost, IRR
Assumptions, rows 38–40 · Exit, rows 16–19 · Returns, rows 6–7 · Returns, rows 10–13 · Returns, rows 16–24 · Returns, rows 27–29
What you should be able to explain
- Why a development is judged on its yield on cost against the exit cap rate, and what the spread between them is paying for.
- How a budget is drawn: land up front, hard costs on an S-curve, soft costs and contingency alongside, a developer fee.
- Why equity goes in first, and how interest during construction is accrued on the opening balance and capitalised.
- How absorption, the share of space leased each quarter, turns an empty building into a stabilised one, and why rent here starts the quarter after the lease is signed.
- How the refinance is sized on loan to value, DSCR and debt yield, and why it often returns equity before the sale.
What a reviewer looks for
- Yield on cost calculated on cost before interest during construction.
- Hard costs drawn evenly when they follow an S-curve.
- Rent from the day of completion, with no lease-up.
- Tenant improvements and leasing commissions left out of the budget.
- A refinance sized on loan to value alone, when the debt yield binds.
Conventions this workbook uses
Stated on the cover sheet too. A model is only as trustworthy as the decisions it tells you it made.
- Quarterly periods, Q0 to Q17. Construction runs Q1 to Q8, lease-up Q9 to Q14. Base case: refinance at the end of Q14 (stabilisation), sale at the end of Q16; Q17 exists only to give forward NOI at the sale.
- Rents, costs and interest rates are entered as annual figures and divided by four for each quarter. Rent growth is an annual rate compounded quarterly from completion.
- Equity is drawn first until it reaches total cost before financing x (1 - loan to cost); the construction loan funds the rest.
- Construction loan interest accrues on the opening balance, so the model has no circular reference. NOI pays it once the building earns any; the rest is capitalised onto the loan.
- Rent is earned on space occupied at the start of each quarter, so a lease signed in a quarter pays from the next. Tenant improvements and leasing commissions are one-off costs in the development budget, spent in the quarter the space is leased; operating costs not recovered are recurring and reduce NOI.
- Operating costs start at completion, before rent has built up, so the first quarters of lease-up run at a loss. Equity funds that deficit through the levered cash flow; it is not in the budget or in equity invested.
- The permanent loan is interest only and sized on forward NOI at the refinance, at the lowest of loan to value, DSCR and debt yield. The sale is priced on forward NOI at the exit cap rate.
Build it yourself
The starter workbook
The Funding sheet has been cleared: equity drawn first to its requirement, then the construction loan, interest on the opening balance paid from NOI or capitalised, and the repayment at the refinance. Build it so that the Returns sheet shows total cost including capitalised interest and the yield on cost. The Checks sheet shows when sources equal uses in every quarter.
Blanks: Construction funding. Free with any account. Compare with the worked model when you are done: download above.
The path around this model
Understand it, drill it, read the build, then apply it to a real company.
Build · Lab · ~12 min
Rent Roll Underwriting
Turn a rent roll into income, read mark to market and the reversion, price the first lease expiry with downtime and leasing costs probability-weighted, and state the WALT.
Read · Guide · 13 min
Real Estate Financial Modelling: Why Corporate Finance Mechanics Break Here
Read · Guide · 12 min
Project Finance Modelling: Cash Flow Waterfalls, DSCR Sizing and the Debt Sculpt
Read · Guide · 11 min
Financial Modelling Best Practices: The Conventions That Make a Model Auditable
Apply · Skill
Model Audit
Find the errors in a financial model before someone senior does.
Vocabulary: Yield on Cost, Development Spread, Loan to Cost (LTC), Interest During Construction (IDC), Absorption, Stabilisation, Tenant Improvements and Leasing Commissions (TI/LC), Profit on Cost, Net Operating Income (NOI), Cap Rate (Capitalisation Rate), Debt Yield.
Questions about this model
What is the development spread?
The yield on cost less the cap rate the finished building would sell at. A building that costs $86 million and earns $5.9 million of stabilised NOI yields 6.8% on cost; if comparable buildings trade at a 5.25% cap rate, the spread is about 155 basis points. That margin is what compensates for construction, leasing and market risk; a scheme with too little of it does not cover those risks.
Why does equity go in before the loan?
Because the construction lender wants the sponsor’s money at risk first. Equity funds the budget until it reaches the share the loan-to-cost leaves, and the loan funds the rest. It also means interest starts later, which is cheaper.
How is interest during construction handled?
It accrues on the opening loan balance each quarter, which keeps the model free of circular references. Once the building earns income, that income pays the interest; whatever it does not cover is capitalised onto the loan. The total is part of the development cost the yield on cost is measured against.
How does this differ from the property acquisition model?
The acquisition model buys income that already exists and asks what it is worth. This one creates the income: a budget instead of a price, a construction loan instead of a mortgage, lease-up instead of a rent roll in place. The two share the loan sizing, and the finished building here is the kind of asset the acquisition model underwrites.
What does it cost?
Nothing to preview: the whole workbook is on this page, and a free account works with it online, every formula included. Every starter workbook downloads with a free account. L3VLUP Plus ($4.99/month) keeps one worked model each billing month, yours for good, and L3VLUP Pro ($25/month) keeps every one.
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