The terms a development pro-forma uses, in plain words.
53 terms
Amenity cost charge
A fixed-rate municipal charge per dwelling unit toward community amenities such as community space and parks. It replaces the negotiated CAC for those amenities, and is a separate charge from the DCC.
Related: DCC, CAC, Soft costs
Apartment Construction Loan Program
CMHC’s program for financing new rental housing. A lending flexibility score out of 100 sets the tier, and the tier sets the maximum loan to cost, the amortization and the term. The take-out loan is tested on loan to value.
Related: CMHC, LTC, LTV, Amortization, NECB
The number of years over which a loan’s payments would fully repay it. A longer amortization lowers the annual payment, which helps the debt coverage ratio.
Related: DCR, Take-out loan, ACLP
A use or density the zoning bylaw allows outright: no rezoning and no discretionary approval, only the permits any build needs. More than that takes a density bonus, a variance or a rezoning.
Related: FSR, Bonus density, ZFA
All the floor area that gets built, sellable or not. In Pencilab it is the net sellable area grossed up by the efficiency, and the construction cost is priced on it. Over the allowable zoned floor area, it is flagged.
Net sellable area ÷ efficiency
Related: Net sellable area, Efficiency, ZFA, Hard costs
Community amenity contribution
A negotiated contribution, usually in return for extra density. Pencilab enters it as one amount, a rate per bonus sf, or a share of the land lift. It is separate from the DCC and the ACC, which are fixed per unit.
Related: Bonus density, DCC, ACC, Soft costs
Capitalization rate
The yield a buyer expects from a stabilized rental building. Dividing the NOI by it gives the project value, so a lower cap rate means a higher value.
NOI ÷ cap rate = project value
Related: NOI, Stabilized value, Development spread, Return on cost
A year’s levered cash flow as a share of the equity invested: the yield the partners’ money earns from the rent while the building is held, before any sale. A hold of a few years lives on it; the IRR adds the sale.
Levered cash flow ÷ equity invested
Related: Levered cash flow, Equity, IRR
After the preferred return, a stretch of profit that goes mostly or wholly to the GP sponsor until it has caught up to its agreed share of all profit so far. It can be none, partial or full.
Related: Preferred return, Promote, GP
Canada Mortgage and Housing Corporation
Canada’s federal housing agency. In a rental hold the take-out loan can be CMHC-insured, with its terms set by programs such as the ACLP.
Related: ACLP, Take-out loan, NECB
The senior loan that funds the build: the project’s budget less the private equity. It carries interest and fees, which count in the financing cost, and it is repaid at the sale or by the take-out loan.
Related: Equity, LTC, Take-out loan, TPC
An allowance, as a share of the construction cost, for what the estimate does not foresee. In Pencilab each half has one: a hard-cost contingency beside construction, and one among the soft costs.
Related: Hard costs, Soft costs
Development cost charge
A municipal charge per dwelling unit toward hard infrastructure such as roads, water, sewer, drainage and parks. A commercial unit is not charged. It is a separate charge from the ACC and from the CAC.
Related: ACC, CAC, Soft costs
Debt coverage ratio
How many times the NOI covers the loan’s annual payment. Lenders set a minimum, and the take-out loan is limited by both it and the maximum loan to value.
NOI ÷ annual mortgage payment
Related: NOI, LTV, Amortization, Take-out loan
The yield on cost less the cap rate, in basis points: what a developer earns over the price the market pays for a finished building’s income. Pencilab watches for 100 bps or more; under the cap rate, the building is worth less than it cost.
Yield on cost − cap rate
Related: Return on cost, Cap rate, Value created
The cash a project pays its partners. On a rental hold with the Simple waterfall each month’s levered cash flow is paid out one of three ways: the preferred returns only, stopping at the first capital step; the Equity waterfall’s steps in order, preferred returns and capital, then profit; or nothing until the sale.
Related: Levered cash flow, Preferred return, LP, GP
What a loan’s quoted rate comes to on the whole loan over the whole term, as the money is actually drawn: a loan drawn late or in part costs less than its rate on the full amount. About the quoted rate times the share drawn on average.
Quoted rate × share of the loan drawn on average
Related: Construction loan, Mezzanine loan
The share of the built floor area that you can sell. A higher figure means less lost to corridors, stairs and walls. Pencilab starts from the building type’s default and shows a status against its typical range.
Net sellable area ÷ built floor area
Related: Net sellable area, Built floor area
Effective gross income
The rent and other income of a year, after vacancy and bad debt. It is where the line down to the NOI starts, and the base for the management fee.
Gross potential rent − vacancy and bad debt
Related: Vacancy and bad debt, NOI, Operating expenses
The money the partners put in to cover what the loan does not. Pencilab calls it private equity, and a partner’s part of it is the GP equity or the LP equity.
Related: LTC, Construction loan, GP, LP, Preferred return
Floor space ratio
How much floor area zoning lets you build, as a multiple of the lot’s area. It sets the allowable zoned floor area, and Pencilab prices the land per sf of that area.
Lot area × FSR = allowable zoned floor area
Related: ZFA, Bonus density, Built floor area
General partner
The developer who runs the project, called the GP sponsor in Pencilab. It can invest its own money, and it takes a share of the profit, with a promote above the hurdles.
Related: LP, Equity, Promote, Preferred return
The project’s profit: the sales revenue less sales & marketing and the total project cost, before any LP or GP sponsor return. It is not any one partner’s profit.
Sales revenue − sales & marketing − total project cost
Related: TPC, Return on cost, Preferred return, Promote
The physical cost of construction: the building itself, plus any parkade, basement, balconies or site work you price on their own. The main rate is priced on the built floor area.
Related: Built floor area, Soft costs, Contingency, TPC
The return the LPs must reach before the profit split changes. Pencilab sets each hurdle as an LP IRR; above it, the GP sponsor’s share rises.
Related: Promote, IRR, Preferred return
Internal rate of return
The yearly rate at which a partner’s money in and money out balance, counting when each is paid. It rewards getting money back sooner, and it is the measure Pencilab uses for hurdles.
Related: ROI, Equity multiple, Hurdle
What a rental building earns in a year after its operating expenses and its mortgage payment: the NOI less the take-out loan’s debt service. It is the cash the hold has to pay its partners, and the numerator of the cash-on-cash return.
NOI − mortgage payment
Related: NOI, Take-out loan, Cash-on-cash return, Distributions
Limited partner
An investor who supplies private equity but does not run the project. LPs are paid first, through a preferred return, and then share the profit with the GP sponsor.
Related: GP, Equity, Preferred return, Accredited investor
Loan to cost
The loan as a share of the total project cost. It is the construction lender’s test and the limit an ACLP tier sets; a higher LTC means less equity and more leverage. The take-out loan is tested on loan to value instead.
Loan ÷ total project cost
Related: TPC, Equity, Construction loan, ACLP, LTV
Loan to value
The loan as a share of what the building is worth at the cap rate. Lenders set a maximum; the take-out loan is tested on it together with the debt coverage ratio, and the smaller of the two loans they allow is the most it lends.
Loan ÷ building value
Related: LTC, DCR, Take-out loan, Stabilized value, Cap rate
A second loan behind the senior construction loan, at a higher rate for the greater risk: it fills part of what the senior lender will not fund, so less private equity is needed. Repaid after the senior loan and before the partners.
Related: Construction loan, Equity, LTC
The floor area you can sell or rent: the sum of your units, without corridors, stairs, lobbies and walls. Sale prices and rents are per sf of net sellable area.
Related: Built floor area, Efficiency, Unit mix
Net operating income
A year’s effective gross income less the operating expenses, before the mortgage payment. It values the building at the cap rate and tests the loan’s debt coverage.
Effective gross income − operating expenses
Related: EGI, Operating expenses, Cap rate, DCR
One pro-forma scenario: one site, one exit, every assumption and return. A project pencils when its numbers work: a condo sale at a 15% return on cost or more, the line lenders look for; a rental hold when its yield on cost beats its cap rate by 100 bps or more. Under the line but profitable, it barely pencils.
Related: Pro-forma, Gross profit, Return on cost
A projection of a development before it is built: what the land, the construction and the financing will cost, what the finished project will sell or rent for, and the profit left over.
Related: Pencil, TPC, Gross profit
What the project earns for each dollar it costs: the gross profit over the total project cost for a sale, or the NOI over it for a rental, where it is called the yield on cost.
Gross profit ÷ total project cost
Related: Gross profit, TPC, NOI, Development spread
Return on investment
A partner’s total profit as a share of the money it put in. Unlike the IRR, it ignores when the money moves.
Total profit ÷ capital invested
Related: IRR, Equity multiple
Everything it takes to deliver the project other than construction: consultants, the development fee, municipal charges, the contingency and similar. In Simple they are one share of the construction cost plus the contingency; Detailed prices them line by line, the DCC and ACC per dwelling unit.
Related: Hard costs, Contingency, DCC, ACC, CAC, TPC
What a rental building is worth once it is built and leased up, taken as its NOI over the cap rate. Pencilab tests the take-out loan on it and sells the building at it, unless the hold runs year by year: then the sale is valued on the NOI after it, at the exit cap rate.
NOI ÷ cap rate
Related: NOI, Cap rate, LTV, Value created
The long-term loan on a finished rental building that replaces the construction loan. The lender’s minimum debt coverage and maximum loan to value each allow a loan; the smaller is the most it lends, and what the construction loans owe beyond it is additional equity.
Related: LTV, DCR, Construction loan, CMHC, Amortization
Total project cost
Everything it costs to deliver the project: land, hard and soft costs, and the financing cost. It is the base for the return on cost and for the lender’s loan to cost.
Development costs + financing cost
Related: Hard costs, Soft costs, LTC, Return on cost, Gross profit
The breakdown of the homes by type, such as studios, one-bedrooms and townhomes, with the count, area and price or rent of each. It sets the net sellable area and the revenue.
Related: Net sellable area, Built floor area
What the finished building is worth over what it cost: the building value less the total project cost. When the building is worth less than it cost, Pencilab calls it a value shortfall.
Building value − total project cost
Related: Stabilized value, TPC, Development spread, Return on cost
The stabilized net operating income over the total project cost: what a rental building earns a year on what it cost to build. Set against the cap rate it gives the development spread.
Net operating income ÷ total project cost
Related: Development spread, Cap rate, NOI
Zoned floor area
The floor area zoning allows on the lot. Land is priced on all of it, and “density used” compares the built floor area against it, flagging anything over.
Lot area × FSR
Related: FSR, Built floor area, Bonus density