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.
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.
| A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 | Assumptions | ||||||||||||||||||||
| 2 | Blue cells only. $ millions; area in thousands of square feet; rents and costs per square foot a year; quarters. The site is invented. | ||||||||||||||||||||
| 4 | Quarter | Unit | Q0 | Q1 | Q2 | Q3 | Q4 | Q5 | Q6 | Q7 | Q8 | Q9 | Q10 | Q11 | Q12 | Q13 | Q14 | Q15 | Q16 | Q17 | |
| 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 at the end of quarter (stabilisation) | # | 14 | ||||||||||||||||||
| 8 | Sale at the end of quarter | # | 16 | ||||||||||||||||||
| 10 | The budget | ||||||||||||||||||||
| 11 | Land, paid at Q0 | $m | 12.0 | ||||||||||||||||||
| 12 | Hard costs, total | $m | 50.0 | ||||||||||||||||||
| 13 | Hard cost draw profile (S-curve) | % | 5.0% | 10.0% | 15.0% | 20.0% | 20.0% | 15.0% | 10.0% | 5.0% | |||||||||||
| 14 | Soft costs: design, permits, legal, % of hard costs | % | 15.0% | ||||||||||||||||||
| 15 | Contingency, % of hard costs | % | 5.0% | ||||||||||||||||||
| 16 | Developer fee, % of hard and soft costs | % | 3.0% | ||||||||||||||||||
| 18 | The building and the lease-up | ||||||||||||||||||||
| 19 | Rentable area (thousand sq ft) | # | 200 | ||||||||||||||||||
| 20 | Absorption: share of the building let in the quarter | % | 20.0% | 20.0% | 20.0% | 15.0% | 10.0% | 8.0% | |||||||||||||
| 21 | Market rent at completion ($ per sq ft a year) | $/sf | 40.00 | ||||||||||||||||||
| 22 | Rent growth a year | % | 3.0% | ||||||||||||||||||
| 23 | Vacancy and credit loss on let space | % | 2.0% | ||||||||||||||||||
| 24 | Operating costs not recovered ($ per sq ft of the building a year, from completion) | $/sf | 9.00 | ||||||||||||||||||
| 25 | Tenant improvements ($ per sq ft let) | $/sf | 35.00 | ||||||||||||||||||
| 26 | Leasing commissions ($ per sq ft let) | $/sf | 10.00 | ||||||||||||||||||
| 28 | Construction loan | ||||||||||||||||||||
| 29 | Loan to cost | % | 60.0% | ||||||||||||||||||
| 30 | Construction loan rate a year | % | 7.5% | ||||||||||||||||||
| 32 | Refinance and sale | ||||||||||||||||||||
| 33 | Market cap rate (values the building at refinance) | % | 5.0% | ||||||||||||||||||
| 34 | Permanent loan: maximum loan to value | % | 60.0% | ||||||||||||||||||
| 35 | Permanent loan: minimum DSCR (interest only) | x | 1.5x | ||||||||||||||||||
| 36 | Permanent loan: minimum debt yield | % | 8.0% | ||||||||||||||||||
| 37 | Permanent loan rate a year, interest only | % | 5.5% | ||||||||||||||||||
| 38 | Exit cap rate | % | 5.3% | ||||||||||||||||||
| 39 | Selling costs, % of the sale price | % | 1.5% | ||||||||||||||||||
| 40 | Exit cap rate sensitivity step | % | 0.5% |
Click any cell. The inspector names the line, the schedule it belongs to and what kind of cell it is; blue on cream is an input, black a calculation, green a value from another sheet. Scroll sideways to see every year.
Download
Real estate development model: the workbook
Native Excel, formulas live, no macros, no external links. Inspect it above first; the file is the same model with the formulas in it.
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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
Ground-up development of an office building, quarter by quarter: land, a construction budget drawn on an S-curve, equity first and then a construction loan with interest during construction, lease-up from quarterly absorption, a refinance at stabilisation, and a sale on forward income.
The answer is the development spread, the yield on cost less the cap rate the finished building sells at. It is the margin that pays for construction, leasing and market risk, and the first number an investment committee asks for.
Change the absorption, the rent, the hard costs or the exit cap rate and watch the yield on cost, the refinance proceeds and the levered return move.
Seats: Private equity, Investment banking.
Careers that do this work: infrastructure & real assets, private equity.
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 turns an empty building into a stabilised one, and why rent arrives a 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.
- Quarters, because construction draws and lease-up move quarter by quarter. Rent and costs are entered a year and divided by four.
- Equity is drawn first until it reaches total cost times one less the loan to cost; the construction loan then funds the rest. Lenders require it in that order.
- Interest during construction accrues on the opening balance, so the model has no circular reference. Income 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 commissions are spent in the quarter the space is let.
- Operating costs start at completion, before rent has caught up, so the first quarters of lease-up run at a loss. Equity funds that deficit, and it appears in the levered cash flow rather than in the budget.
- The permanent loan is interest only and sized on forward NOI at the refinance, at the tightest 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 first to its requirement, then the construction loan, interest during construction on the opening balance, paid from income or capitalised, and the repayment at the refinance. Build it so that the Returns sheet shows the total cost including interest and the yield on cost, and the Checks sheet confirms sources equal uses 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 pays for construction, leasing and market risk, and a scheme without enough of it is not worth building.
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 inspect: the whole workbook is on this page. A free account chooses one worked model to keep, and downloads every starter workbook. L3VLUP Pro ($25/month) downloads the whole library and opens every model’s formulas in the inspector.
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