THE NUMBER · THE ECONOMY · COLLATERAL MARKETS
A bank lent 65% of the value of a factory valued at US$10m. If it has to sell, it expects a forced-sale discount of 30%, and selling costs of 5% of the sale price.
// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON
Development Feasibility: a Worked Example
The developer's argument, put back to the developer with evidence.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED · 6 MIN READ
// THE SHORT ANSWER
A development feasibility is the page a lender turns to first and trusts last. It sets out a project's expected sale proceeds and all its costs, and shows the profit left between them. A developer prepares it to show the scheme works. A credit officer rebuilds it from independent evidence, line by line, because the loan is repaid from sales that have not happened and from a building or subdivision that does not yet exist. The useful output is not the margin on the first page. It is how far prices, costs and time can move before the margin, and then the debt, is exposed.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// MAKE THE CALL
Issue 08 — Basalt Ridge Developments. A new-to-bank developer, a claimed 28% ROE and two other banks circling. Your bank has a growth target. Your call first, then the senior banker's.
PART OF Property Development Finance
// 01 — WHAT THE DOCUMENT IS FOR
A trading business brings a lender its history. A development brings a forecast of a single project, and the feasibility is that forecast in its most compact form. It also has an author with an interest in the answer. Nothing about that is improper: a developer has to believe in the scheme to start it. But a figure that a developer needs to be true is different from a figure that has been tested, and a lender's work is to find out which is which.
The document also does a job for the lender beyond the credit decision. It becomes the budget against which the loan is drawn, the source of the loan to cost ratio, and the reference point for every later change. Property Development Finance reads a whole proposal around it; this page is about the feasibility itself.
// 02 — HOW IT IS BUILT
Gross sales (GDV in the UK, GRV in Australia)
− selling costs and any tax on sale
= net sales proceeds
− land and acquisition costs
− construction or civil works
− contingency
− consultants, consents, levies and contributions
− finance costs, including capitalised interest
= development margin
Margin on cost = margin ÷ total cost
Margin on GDV = margin ÷ gross sales
Three features trip up a first reading. The first is tax. Sales must be stated net of whatever goes to the tax authority, and the three markets differ. In New Zealand a GST-registered developer's sales generally carry GST. In Australia the sale of new residential premises is a taxable sale, and a seller eligible for the margin scheme can pay GST on its margin in place of the whole price. In the UK, the first sale of a new dwelling by the person constructing it can be zero-rated. A feasibility that mixes tax-inclusive sales with tax-exclusive costs overstates its margin.
The second is interest. A single-page feasibility may estimate it, but the true figure depends on when the money goes out and the sales come in, so a lender asks for a monthly cash flow behind the summary. The third is the land. A developer who enters the land at today's valuation rather than at what it paid has placed a paper gain in the equity column, and a lender reads it at cost unless there is reason to do otherwise.
// 03 — THE EXAMPLE
A developer plans a residential subdivision of 60 sections, constructed for this page like every figure in it. It asks for a loan of US$8.0m. The rate, margins, price movements and cost changes below belong to the example and are not offered as market norms. All figures exclude tax on sale.
As submitted (US$m)
Sales: 60 sections at 0.250 15.00
Selling costs at 3% − 0.45
Net sales proceeds 14.55
Land 4.60, civil works 5.40, contingency 0.27,
fees and levies 0.93, interest 0.85 12.05
Margin 2.50 on cost 20.7%
As the lender reruns it
Prices at the presale average: 60 × 0.235 14.10
Selling costs at 3% − 0.42
Net sales proceeds 13.68
Cost as submitted 12.05
Quantity surveyor's civil works, + 0.45
Six more months' interest, 8.0 × 7.5% × ½, + 0.30
Revised cost 12.80
Margin 0.88 on cost 6.9%
Each change has a source. Eighteen presales averaged US$235,000, against the US$250,000 assumed. The lender's quantity surveyor priced the earthworks and services above the developer's estimate. And the programme assumed consents and civil contractors on a timetable that other projects in that district had not achieved. None of the three is a disaster. Together they remove nearly two-thirds of the margin.
The credit reading is two questions, not one. How far could net sales fall from the lender's own figure before the margin is gone? By 0.88 ÷ 13.68, or 6.4%. How far before the US$8.0m debt is uncovered? By (13.68 − 8.00) ÷ 13.68, or 41.5%. So the developer's cushion is thin, and the lender's is wide, provided the project can be finished. The US$0.75m of extra cost still has to be funded, and that is the live question in this file: more equity at the start, or a contingency that is not sized for it.
// 04 — HOW IT DIFFERS FROM A VALUATION
A feasibility is the developer's own account. A valuation is an independent opinion, instructed for the lender, on what the site or the finished project is worth. Each can be used to test the other. The on-completion value replaces the developer's sales line in the lender's arithmetic. The RICS standard on development property cautions that a valuer of a partly completed project should not rely solely on the costs and income in a project's original plan or feasibility, and says sensitivity analysis should be undertaken, because small changes in inputs can produce large changes in the output.
Two neighbouring ideas use the same arithmetic. Residual land value starts from the sales, deducts all costs and a target profit, and solves for the land. Profit on cost is the margin expressed as a ratio. The feasibility is the document in which both appear.
DEFINED IN ONE PARAGRAPH → · PROFIT ON COST → · RESIDUAL LAND VALUE →
// 05 — WHERE IT DECIDES A FILE
The rerun sets the terms. The gap between the submitted cost and the tested cost usually becomes additional equity, a larger contingency or a presale condition. The tested sale prices usually feed the release mechanics and the valuation instruction. A lender seldom declines because a feasibility is optimistic, since most are. It asks whether the project still stands at the prices and costs its own evidence supports.
The document also has to stay alive. A feasibility prepared at land purchase is often out of date by the time of the application, and one prepared at application is overtaken by the first tender. A lender looks for the date on it and for an update whenever the building contract, the presales or the programme changes. Issue 08 puts a live feasibility in front of the reader and asks for the decision.
// SOURCES
The documents the statements on this page rest on. Each was opened and checked when cited.
- RICS, Valuation of development property, professional standard, global, 1st edition (October 2019, reissued as a professional standard April 2023) — sections 7.1 and 8.4 — Says small variations in inputs can cause relatively high variations in the residual output, says sensitivity analysis should be undertaken, and quotes IVS 410 against relying solely on a project's feasibility study — section 04.
- HM Revenue and Customs, VAT Notice 708: buildings and construction — sections 2.3 and 4.1 — Describes the zero rate for the first sale or long lease of a new qualifying dwelling by the person constructing it — section 02.
// QUESTIONS PEOPLE ASK
- What should be included in a development feasibility?
- The gross sales or end value; selling costs and any tax on sale; land and its acquisition costs; construction or civil works; contingency; professional fees, consents, levies and contributions; finance costs; and the resulting margin. A lender also wants the assumptions behind each line, a monthly cash flow, the programme, the presales schedule and a sensitivity to price, cost and time. A single-page summary can be a start but cannot show when money moves.
- What is a good profit margin on a development feasibility?
- No figure suits every project. Developers and lenders usually look for a margin that reflects the risk of the scheme: location, the size of the project, the state of the market, how much has been presold and how fixed the costs are. A lender treats any margin as a cushion to be tested and pays more attention to what is left after prices and costs are rerun than to the percentage first shown. Published hurdle rates vary and are not rules.
- What is the difference between margin on cost and margin on GDV?
- Both divide the same profit by a different base. Margin on cost divides profit by total development cost. Margin on GDV divides it by the gross sales value. Since sales are higher than cost in any profitable scheme, margin on cost is the larger percentage. A project with a cost of US$10m and sales of US$12m earns 20% on cost and about 16.7% on GDV. When comparing projects or lender hurdles, check which base is being used.
- Does a bank do its own feasibility?
- Usually it reruns the developer's rather than starting from nothing. The bank takes the submitted figures and replaces those it does not accept, using a quantity surveyor's cost review, an independent valuation, the actual presales and its own view of the programme and interest. The result is the lender's case, which is the one it sizes the loan and sets its conditions on, and it can differ materially from what the developer first presented.
// NEXT TO IT
- PROPERTY AND DEVELOPMENTOn-completion valueOne unbuilt project can carry three honest values.
- PROPERTY AND DEVELOPMENTContingency (construction budget)The sum left matters less than the rate it is going.
- PROPERTY AND DEVELOPMENTQuantity surveyor (QS)The builder says what was done. Someone else has to say it was.
- PROPERTY AND DEVELOPMENTLoan to cost (LTC)The ratio moves with whatever the budget counts.
// ON WHOSE DESK
The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.
- Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
- Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
- Workout and recoveries managerTakes the files that have gone wrong and works out how much the bank gets back, and how.
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