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Glossary & Field Guide

Every metric in the model, explained the same way: what it is, why it matters, what healthy looks like, what moves it, and the mistake first-time developers make.

NOI (Net Operating Income)

What it is: Rental income minus operating expenses, before any debt payments.
Why it matters: The single most important number in commercial real estate — value, financing capacity, and returns all flow from NOI.
Healthy range: There is no universal target; what matters is that every line beneath it (rent, vacancy, taxes) is verified, not hoped.
What moves it: Rent $/SF, vacancy, and operating expenses — especially property taxes, which reassess upward on new construction.
The rookie mistake: Computing NOI off best-case rent with zero vacancy. Lenders will re-underwrite it with market vacancy and believe their number, not yours.

Cap Rate

What it is: NOI ÷ property value — the unlevered yield a buyer demands for this asset class and market.
Why it matters: It converts income into value. Lower cap rate = higher value for the same NOI.
Healthy range: Suburban Chicago flex has traded around 7.5–8.5%. Verify with recent local sales, not national averages.
What moves it: Interest rates, buyer demand for the asset class, tenant quality, and lease term.
The rookie mistake: Valuing your exit at today’s cap rate after a 10-year hold. Standard practice adds 25–75bps of expansion for the aging asset and rate uncertainty.

Yield on Cost (leased basis)

What it is: Stabilized NOI ÷ the share of total cost attributable to the leased units.
Why it matters: It is the "build" yield to compare against the "buy" yield (cap rate). Building only makes sense if you create yield you could not simply purchase.
Healthy range: Should beat the market cap rate by 100–150bps or more. ≥9% green, 7.5–9% yellow, below 7.5% red at current cap rates.
What moves it: Rent and vacancy (numerator); hard costs, land basis, and financing carry (denominator).
The rookie mistake: Comparing yield on cost that includes the for-sale units’ cost against NOI that excludes their income. Keep the bases apples-to-apples — sold units are judged by Sale Profit instead.

Spread vs Cap Rate

What it is: Yield on cost minus the market cap rate.
Why it matters: This is the reward for taking development risk. If the spread is thin, you are doing all the work of building to earn what a buyer earns by signing a purchase agreement.
Healthy range: ≥150bps green, 100–150bps yellow, under 100bps red.
What moves it: Everything that moves yield on cost, plus the cap rate itself.
The rookie mistake: Proceeding on a sub-100bps spread because the base case "works". One GC overrun or one slow lease-up and you built at a loss relative to buying.

Development Margin

What it is: (Total value created − total cost) ÷ total cost, where value = stabilized value of leased units + net sale proceeds.
Why it matters: The combined profit across the hold and sell strategies, as a return on every dollar spent.
Healthy range: ≥15% green for a first deal; 5–15% yellow; below 5% you are not being paid for the risk.
What moves it: Sale prices and cap rate on the value side; hard costs, land, and financing on the cost side.
The rookie mistake: Treating the margin as banked. It is a paper number until sales close and leases commence — stress-test rent, cap rate, AND sale price before believing it.

DSCR (Debt Service Coverage Ratio)

What it is: NOI ÷ annual debt service on the permanent loan.
Why it matters: The lender’s primary safety metric. It answers: how much can income fall before the mortgage stops being covered?
Healthy range: Lenders require 1.20–1.25x minimum; ≥1.30x is comfortable.
What moves it: NOI, the loan amount, interest rate, and amortization period.
The rookie mistake: Computing DSCR off best-case NOI with zero vacancy. The lender will apply their own vacancy and expense loads — underwrite to survive theirs.

Cash Flow After Debt Service

What it is: NOI minus the annual permanent loan payment — what actually hits the bank account each year.
Why it matters: This is the recurring return on the equity left in the deal, and the cushion that absorbs surprises.
Healthy range: Positive with room to spare. If it only clears zero at full occupancy, the deal has no shock absorber.
What moves it: Everything in NOI, plus loan size and rate.
The rookie mistake: Forgetting that replacement reserves and management are real costs even when you self-manage — skipping them flatters this number until the roof bill arrives.

Sale Profit

What it is: Net sale proceeds minus the cost basis of the sold units.
Why it matters: The one-time profit from the for-sale strategy — typically what returns investor equity before lease-up cash flow begins.
Healthy range: Judged in dollars against the equity it returns, not as a percentage benchmark.
What moves it: Sale price $/SF (verify with unit-sale comps, not lease comps), sales costs, and construction cost of the sold buildings.
The rookie mistake: Assuming presale demand at your modeled price without contracts. Flex the sale price down 10–15% and check the deal still stands.

Equity Returned via Sales

What it is: Sale proceeds applied against invested equity, capped at 100% of the equity.
Why it matters: This is the de-risk metric: once sales have returned all equity, everything that follows is upside on recovered capital.
Healthy range: 100% at the planned sale count. In the current plan a single building sale returns all equity.
What moves it: Number of buildings sold, sale price, and the equity requirement (driven heavily by LTC).
The rookie mistake: Reading a high IRR after early equity return as the headline. Once capital at risk is ~zero, IRR becomes unstable — MOIC and total profit are the honest numbers.

LTC (Loan-to-Cost)

What it is: Construction loan ÷ total project cost. The share of the build the bank funds.
Why it matters: It sets the equity check: equity = cost × (1 − LTC). At 85% LTC vs 70%, the equity requirement roughly doubles between them.
Healthy range: Conventional lenders: 65–75% for new sponsors. The 85% default here assumes the SBA manufacturing-loan path (up to ~90%); fallback is 70%.
What moves it: Lender appetite, sponsor track record, and program qualification (SBA).
The rookie mistake: Building the capital plan around the optimistic LTC. Model the conventional fallback too — if SBA falls through, do you have the extra equity?

Permanent Loan Sizing

What it is: The long-term mortgage that replaces the construction loan at stabilization. Lenders size it as the LEAST of three tests: LTV × value, the loan a DSCR floor supports, and the loan a debt-yield floor supports.
Why it matters: Whichever constraint binds determines your refinance proceeds — and whether the construction loan can be fully paid off.
Healthy range: Know which test binds and by how much. If DSCR or debt yield binds well below LTV, the market is telling you the income is thin for the leverage.
What moves it: NOI, cap rate (value), interest rate, amortization, and the lender’s floors.
The rookie mistake: Sizing the perm loan off LTV alone. A rate spike between now and stabilization can make DSCR the binding test and leave a payoff gap.

Interest Reserve

What it is: Loan interest that accrues during construction and lease-up, funded from the loan itself before any rent exists.
Why it matters: Interest runs 12–18 months before income starts. Underfund the reserve and you are writing personal checks to the bank mid-construction.
Healthy range: Sized off a realistic draw curve and an honest construction + lease-up timeline.
What moves it: Loan size, rate, construction duration, and how fast you draw (the S-curve).
The rookie mistake: Underestimating the timeline. Every month of delay is another month of interest with no rent against it.

Contingency

What it is: A budget reserve on top of estimated hard and soft costs.
Why it matters: It is what keeps a surprise (soil, steel prices, tap fees) from becoming a capital call to investors.
Healthy range: 5–10% is standard; lean toward 10% on a first deal.
What moves it: Design completeness, GC bid quality, and site unknowns.
The rookie mistake: Treating contingency as profit to be "saved". It is insurance — if you get it back at the end, great, but never plan on it.

IRR (Internal Rate of Return)

What it is: The annualized rate at which the deal’s cash flows discount to zero — a time-weighted return on equity.
Why it matters: It is the standard for comparing investments with different timing. Getting money back sooner scores higher.
Healthy range: Development deals typically target mid-teens to 20%+ levered. Treat anything dramatically higher with suspicion — check what leverage and early capital return are doing to it.
What moves it: Cash flow timing above all; then leverage, exit value, and hold length.
The rookie mistake: Quoting the IRR after a year-1 sale returns all equity. With ~zero net capital at risk, IRR explodes and small input changes swing it wildly — lead with MOIC and total profit instead.

MOIC (Equity Multiple)

What it is: Total cash returned ÷ equity invested, ignoring timing.
Why it matters: The robust companion to IRR: it cannot be gamed by timing, only by actually returning more dollars.
Healthy range: Context-dependent; for a 10-year levered hold, 2.0x+ is solid. Very high multiples usually mean very high leverage — read them alongside the unlevered numbers.
What moves it: Total profit and the size of the equity base (leverage).
The rookie mistake: Comparing MOICs across different hold periods. 2.0x in three years is a very different deal from 2.0x in ten.

Breakeven Occupancy

What it is: The occupancy level at which NOI exactly covers the mortgage payment.
Why it matters: The most intuitive risk number in the deal: how empty can the buildings run before you write personal checks to the bank?
Healthy range: Below ~80% is comfortable — a two-tenant loss still covers the loan. Above 90%, one vacancy is a crisis.
What moves it: Rent (down = breakeven up), loan size and rate, and the fixed expenses owed whether or not space is occupied.
The rookie mistake: Forgetting that taxes, insurance, and CAM are owed on empty space too — vacancy cuts income much faster than it cuts costs.

NNN (Triple-Net Lease)

What it is: The tenant reimburses property taxes, insurance, and CAM on top of base rent.
Why it matters: It is the standard flex/industrial structure — most operating cost risk passes through to tenants, which is why NOI stays close to base rent.
Healthy range: Quote and compare all rents as NNN. A $18 NNN and $18 gross lease are very different numbers.
What moves it: The recovery rate (vacant space reimburses nothing) and any caps in the lease.
The rookie mistake: Comparing your NNN asking rent against gross-lease comps and concluding you are underpriced.

First-time developer field notes

1. Get 3 GC bids before trusting any number
Hard cost is the largest line and hardest to estimate. The $/SF in the model is a market default — real bids are what matter.
2. Verify rent with a broker
Ask what comparable flex leased for in the past 12 months, at comparable unit sizes — 9,000 SF rents very differently from 1,800 SF.
3. Keep Highland Vans rent at market
Leasing to your own company is fine, but rent must be at market or the IRS recharacterizes it. Document the comps.
4. Don't skimp on contingency
5–10% is standard; lean toward 10% on a first deal. The contingency is what keeps you out of a capital call.
5. Stress-test rent, cap rate, AND sale price
If only the base case works, you are not pricing risk. The tornado chart on Returns shows which input to stress first.
6. Mind the construction interest
Interest accrues for 12–18 months before any rent comes in. The interest reserve is easy to underestimate.
7. County taxes are high
McHenry County real estate taxes can run 3–4% of assessed value, and new construction reassesses. Confirm with the assessor.
8. Sequence the buildings deliberately
Phase 1 carries the land. Decide phasing based on which presales or leases you can actually lock down, then update the Assumptions.

Red flags — stop and re-underwrite

Yield on cost below the market cap rate
You are building at a loss relative to buying. Walk away or rework.
DSCR below 1.20x
Lenders will not fund. Even if they do, one slow quarter and the mortgage is at risk.
Hard cost more than 15% above GC bids
Something is missing — site work, utility tap fees, upgraded specs.
A lease-up plan with no comps
If you cannot point to 3 similar leases in the past 12 months at your modeled rent, the rent is wishful.