Multifamily feasibility: the pro forma and yield on cost

Feasibility defines the financial envelope a building has to fit before design begins. The model is built for each pathway the site allows, so the pathways are compared on returns as well as on unit count.

Revenue

The unit mix and the rents set the revenue: market-rate rents from the submarket's recent buildings, restricted rents from the program's income levels, and other income. Vacancy and operating expenses, including property tax on the completed value, take it to net operating income.

The total development cost

• Land, at its basis.
• Hard cost, priced per SF of the construction type the building needs: wood frame on grade, wood frame over a concrete podium, or concrete.
• Soft cost: design, engineering, consultants, permits and the city's fees, such as the park fee, the affordable housing linkage fee and the school fee.
• Financing during construction, and a contingency.

Yield on cost and the spread

Yield on cost is the stabilized net operating income divided by the total development cost. The spread between it and the exit cap rate is the margin the development earns over buying a finished building, and a pathway is pursued when that spread clears the hurdle the capital asks.

Sensitivity and structure

The model is tested at a range of rents, hard costs, timelines and exit cap rates, so the decision rests on the range and not one point. The capital structure, debt and equity, and for a restricted program the tax credits or subsidy, is part of the same model.

How it governs design

Once the envelope is set, design decisions are priced in the model before they are committed, and the cost per SF is tracked as the drawings advance.

Questions

What is yield on cost in multifamily development?

The stabilized net operating income divided by the total development cost, read with the exit cap rate.

What goes into a multifamily total development cost?

Land, hard cost by construction type, soft cost including design, permits and city fees, financing during construction and a contingency.

Sources