Beyond the Basics: 5 Key Factors to Watch in a Real Estate Development Proforma

Last week we walked through the basics of reading a proforma: rents, expenses, debt, and exit cap rate.

That’s the foundation. But we think it’s prudent to take your knowledge one step further, especially when
it comes to new development projects. This asset class can deliver greater benefits than stabilized
properties, but only if you know how to evaluate the extra variables that come into play.

Think of this as Proforma 201: sharpening your tools so you can spot both the risks and the
opportunities.

The Big 5 You Already Know

✔️ Rents
✔️ Expenses
✔️ Exit Cap Rate
✔️ Debt Terms

Those are the basics, and for stabilized properties, they usually do the trick. But when dirt is still dirt,
you’ve got more layers to peel back.

Development-Specific Factors to Watch Closely

1. Timing of Construction

Every month of delay eats into projected returns. Weather, labor shortages, or permit issues can turn
a 12-month schedule into 18. This extra time directly affects the returns due to increased cost due to
interest and mandatory expenses.

2. Cost of Debt During Construction

Unlike stabilized assets, construction loans often carry variable interest rates. If rates climb during the build, so does the project’s cost. If the build takes longer to stabilize, this extra time is with the higher interest rate

3. How Long Until Refinance

The sooner a property is stabilized, the sooner it can refinance into permanent debt (usually at lower rates). But if lease-up drags, investors may be paying more in interest, longer than expected.

4. Yield on Cost

Think of this as the project’s “report card.” Yield on cost compares stabilized income against total project costs. A solid spread between this number and the market cap rate is what creates real value.

5. Timing to Cash Flow

Unlike buying an existing property, new development doesn’t pay distributions from day one. You might wait 18–24 months before seeing cash flow. If your proforma assumes earlier distributions, ask how realistic that is.

Why This Matters

With development, the swings can be wide. Small shifts in timing, debt costs, or lease-up assumptions can dramatically change projected returns. That’s why development deals often advertise higher returns; they carry more risk. The key is understanding which risks are worth taking and whether your sponsor has the track record to manage them.

Final Thought

A proforma isn’t a crystal ball, but it is a map. For existing properties, you only need to check a few landmarks. For development, you’ll want to see the full terrain—the detours, tolls, and potential roadblocks. The investors who do that homework avoid surprises and end up arriving at their destination with both their capital and their confidence intact.