Build your development pro forma.
Before you sign the LOI.

A development pro forma is a financial model that projects all costs and revenues for a project — from land acquisition through construction to exit. It includes sources and uses, hard and soft cost breakdowns, the capital stack (construction debt + equity), a monthly cash flow model, exit valuation, and investor return metrics such as IRR and equity multiple. For residential development it also includes residual land value analysis, which confirms whether the asking land price is defensible at your target return.

Residual land value (RLV) = (Gross Revenue − Development Costs − Vertical Costs − Carry) ÷ (1 + Target Return). Start with projected lot or home sale revenue at market comps, subtract all hard costs, soft costs, and carry, then apply your required return to what remains. If the seller's asking price exceeds your residual land value, the deal does not pencil at your target return. RLV is the single most important number in land underwriting — it tells you the maximum acquisition price.

A GP/LP waterfall defines how cash distributions flow between the General Partner (the developer or sponsor) and Limited Partners (outside investors). The standard structure: (1) LPs receive a preferred return first — typically 8% per year; (2) LP capital is returned in full; (3) remaining proceeds split at the promote ratio, commonly 70/30 LP/GP. The GP's promote is disproportionate profit above the pref — compensation for sourcing, developing, and managing the deal. Modeling the waterfall precisely matters because GP economics shift significantly across hurdle tiers.

A deal pencils when its residual land value supports the asking price at your target return. The check: (1) estimate total development revenue using current market comps; (2) subtract all hard costs, soft costs, and carry; (3) apply your target IRR to derive the maximum land basis; (4) compare to the asking price. If your max basis exceeds the ask — it pencils. If not, you need to renegotiate, find a higher-density entitlement, reduce costs, or walk. The sensitivity table on land price vs. exit price per unit shows how much margin you have.

A residential development feasibility study should cover: (1) market analysis — comparable sales, absorption rate, pricing; (2) site analysis — zoning, entitlements, lot yield; (3) development cost estimate — hard costs, soft costs, infrastructure; (4) financing assumptions — construction loan LTC, interest rate, interest reserve; (5) exit valuation; (6) investor return metrics — IRR, equity multiple, preferred return coverage; and (7) a sensitivity analysis on the two variables that move the deal most, typically land cost and revenue per unit.

Hard costs (direct costs) are physical construction — site work, vertical build, materials, and labor. Soft costs (indirect costs) are everything else: architecture, engineering, permits, financing fees, insurance, legal, marketing, and developer overhead. For residential ground-up development, hard costs typically represent 65–75% of total project cost and soft costs 10–20%. Misestimating either by 5% can determine whether a project pencils, especially on thin-margin infill deals.

A construction loan funds in stages — typically monthly or upon defined milestones. Lenders advance a set LTC percentage (commonly 65–70%) per draw, after inspection confirms the work is complete. Borrowers contribute their equity first, then draw the loan. Interest accrues only on drawn amounts, which is why modeling the exact draw curve matters: it directly determines your interest reserve size and peak equity requirement. A homebuilder running 6 starts per quarter needs a revolving construction line model, not a single-tranche draw schedule.

Lot yield analysis determines how many developable lots a parcel actually produces after accounting for roads, utilities, easements, open space requirements, and zoning setbacks. It is the first step in land underwriting — lot count drives all revenue and cost projections downstream. Getting yield wrong by 10% typically overstates project revenue by 10%, which can make a marginal deal look attractive. A 40-acre parcel with a 20% right-of-way dedication and 6,000 SF minimum lot size yields roughly 220 lots, not 290.

Model investor returns by projecting: (1) total equity contribution — your equity plus LP equity; (2) monthly cash flows — equity draws in, interest accrual, lot or unit sales proceeds out; (3) return of capital at exit; (4) application of the waterfall — preferred return, capital return, then the promote split. Project-level IRR is the internal rate of return on total equity. LP net IRR is the return on LP equity after the waterfall. Standard residential development targets 18–22% project IRR and 15–18% LP net IRR, depending on the deal structure and market.

A construction budget is a line-item cost estimate for building the physical structure — framing, MEP, finishes, site work, GC fee. A development pro forma is the complete financial model for the entire project: it includes the construction budget plus land cost, soft costs, financing costs, sales commissions, carry, and the full capital structure (debt and equity layers). The pro forma shows whether the deal generates acceptable returns for the developer and investors. The construction budget is one critical input into the pro forma.