The half-the-cost-for-half-the-time rule is roughly right for the build and wrong for the scheme, because the loan is at its largest after construction ends.
Lay the costs out month by month on the drawdown curve, charge interest on the opening balance each month and roll it up, then keep going until sales have repaid the loan, and add the facility fees. On an illustrative 14,700,000 build over 24 months at 7.0 per cent, the summary appraisal's rule of thumb gives 1,029,000. The monthly cash flow agrees for the build period, at 1,024,165, but the full finance cost to repayment is 1,552,164, 1.51 times the rule.
Worked in full in The Real Estate Development Manager by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Every summary development appraisal approximates interest the same way: cost, times rate, times the build period, times one half. The logic is that costs are drawn more or less evenly, so on average half the loan is outstanding for the whole period. The interesting result is that the approximation is roughly right about the thing it measures and silent about the things that make finance expensive.
| Input | Value |
|---|---|
| Build costs funded by the loan (construction, fees, contingency, statutory) | 14,700,000 |
| Build programme, months | 24 |
| Interest rate, a year, rolled up monthly | 7.0% |
| Drawdown profile | S-curve |
| Net sales receipts, all applied to the loan | 23,520,000 |
| Sales period after completion, months | 6 |
| Arrangement fee / exit fee, on the facility | 1% / 1% |
The land is funded with equity on day one, so the loan carries construction only. Receipts arrive evenly over the six months after completion, 3,920,000 a month.
Rule of thumb = costs × rate × years × 0.5 = 14,700,000 × 7.0% × 2 × 0.5 = 1,029,000
Monthly: interestt = opening balancet × rate ÷ 12; closing = opening + interest + draw − repayment
S-curve cumulative share of cost at month t of T: =(1-COS(PI()*t/T))/2; the month's draw is the difference between consecutive months times total cost. Interest: =OpeningBalance*Rate/12, at 0.5833% a month. Run the rows until the balance reaches zero, not until the build ends.
| Component | Amount |
|---|---|
| Rule of thumb, build period | 1,029,000 |
| Monthly S-curve, build period | 1,024,165 |
| Interest during the sales period | 233,999 |
| Arrangement and exit fees, 1% each on 14,700,000 | 294,000 |
| Finance cost to repayment | 1,552,164 |
For the build itself the rule is almost exact: a symmetric S-curve leaves, on average, 54.2 per cent of the costs outstanding once rolled-up interest is included, and the two effects roughly cancel. At completion, though, the loan stands at 15,724,165, its peak, with every unit still to sell. It takes five months of sales receipts to clear it, and in those months the interest is charged on the whole balance, not on half of it. Add the fees, which a summary appraisal often leaves in "other costs" or forgets, and the true finance line is 523,164 higher than the rule. On a scheme targeting 4,800,000 of profit, that is 10.9 per cent of the margin.
| Case | Interest before sales | Total with fees | × rule |
|---|---|---|---|
| Even drawdown | 1,029,632 | 1,557,792 | 1.51 |
| S-curve | 1,024,165 | 1,552,164 | 1.51 |
| Back-loaded spend | 749,831 | 1,269,759 | 1.23 |
| S-curve, sales start three months late | 1,300,946 | 1,837,113 | 1.79 |
| S-curve, sales take 12 months | 1,024,165 | 1,745,959 | 1.70 |
The shape of the curve matters less than the appraisal debate suggests: even and S-curve drawdowns give the same answer, and a back-loaded programme is cheaper during the build because the money goes out late. What drives the cost is time at the peak. A three-month wait for sales to start, for a certificate, a utility connection or a slow market, adds 284,949, more than the whole difference between the S-curve and a back-loaded one. A sales period of 12 months instead of 6 adds 193,795.
The lender sees the same arithmetic from the other side. A development facility is sized to cover the costs and the rolled-up interest, so the facility limit has to include the interest to repayment, not just to completion. If the appraisal used the rule of thumb, the facility can run out of headroom in exactly the months when sales are slow and the borrower has least room to negotiate, and the equity is called to fund interest the appraisal never showed.
The common mistake is to treat the half-cost rule as conservative because it is crude. It is not conservative: it stops counting at practical completion, which is precisely when the debt is largest. A summary appraisal that uses it should at least add the sales period at full balance and the fees, and before any land price is agreed the scheme should be run through a monthly cash flow to repayment. If the two disagree, the cash flow is right, and the difference comes out of the land value or the profit.
Development interest is a cash flow, not a percentage: draw monthly, roll the interest up, and run it until the loan is repaid. On this scheme the rule's 1,029,000 is a fair estimate of the build period and a poor one of the cost, which is 1,552,164. The residual appraisal workbook in the free companion files for The Real Estate Development Manager sets a quarterly cash flow beside the summary for exactly this reason, and the residual land value article shows what the finance line does to the land price.
A summary appraisal shortcut: interest equals total build cost times the rate times the build period times 0.5, on the assumption that costs are drawn evenly and outstanding for half the period on average. On 14,700,000 over 24 months at 7.0 per cent it gives 1,029,000. It ignores the sales period and fees.
Not much during the build if the curve is symmetric. On the illustrative scheme an S-curve produces 1,024,165 of build-period interest against 1,029,632 for even drawdown. A back-loaded curve, with spend concentrated late, is cheaper during the build at 749,831. The larger effects come after completion, while the loan sits at its peak waiting for sales.
Each month the loan waits at its peak costs a full month of interest on the whole balance plus rolled-up interest. On the illustrative scheme a three-month delay before sales start lifts the total finance cost from 1,552,164 to 1,837,113, 1.79 times the rule-of-thumb figure of 1,029,000.
This article is one calculation from The Real Estate Development Manager. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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