Land development pro forma: how to know if a deal pencils

A pro forma is just a structured answer to one question: if I buy this land and build on it, do I make money? Strip away the spreadsheet and it's four moving parts — what you can build, what it costs, what it's worth, and what's left over. Here's each part in plain terms, with a worked example.

The four parts of every development pro forma

However complex a model looks, it resolves to this:

1. What you can build — buildable units and gross floor area (GFA), set by zoning.
2. What it costs — land + hard costs + soft costs + financing.
3. What it's worth — gross development value (GDV) of the finished product.
4. What's left — profit, and the margin or return that profit represents.

Step 1 — What you can build

Zoning, not ambition, sets the envelope. The key lever is the floor-area ratio (FAR) — buildable GFA is roughly lot size × FAR, then trimmed by setbacks, height limits, and parking. Unit count follows from usable area:

Step 2 — What it costs

Total project cost has four buckets:

• Land — the acquisition price.
• Hard costs — construction itself, usually GFA × cost per buildable foot.
• Soft costs — design, permits, fees, insurance, marketing; often 15–25% of hard costs.
• Financing — interest carry over the build and lease-up period.

Step 3 — What it's worth

Gross development value is the finished project's worth. For a sale, it's units × sale price per unit. For a rental, it's net operating income ÷ capitalization rate. GDV is the number every cost is measured against.

Step 4 — Profit and return

Profit is simply GDV − total cost. Two ratios tell you if it's enough:

• Profit margin on cost = profit ÷ total cost. Many developers want 15–25%.
• Return on cost vs. exit cap — the spread between your yield on cost and the market cap rate is your reward for taking development risk.

A 22% margin on cost clears most developers' hurdle — this site is worth pursuing. Move land price up $500k or rents down 8%, though, and the same deal slips under 15%. That sensitivity is the whole game.

What moves the answer most

When you stress-test a deal, three inputs swing it more than anything else: land price, construction cost per foot, and achievable rent or sale price. A good feasibility tool lets you flex all three and watch the margin move, so you negotiate from numbers instead of hope.

The same framework, scaled down to one structure

You don't need a 24-unit deal to run a pro forma. The same four parts drive a single ADU, guest house, detached garage, backyard office, or pool house — just simpler:

• What you can build — not FAR and unit count, but the buildable size left after your setbacks, lot coverage, and existing home.
• What it costs — buildable size × a construction cost per square foot for that structure type.
• What it's worth — this is where the structure type matters. A rentable ADU is valued exactly like a rental building's GDV: its income, capitalized (annual rent ÷ cap rate). A non-rentable accessory — garage, workshop, pool house — or an occupancy-restricted guest house has no income to capitalize, so it's valued on cost recapture: the share of its cost a buyer pays back.
• What's left — added value minus cost, read as ROI (for an income unit) or a recapture percentage (for an accessory).

That single fork — income versus recapture — is why an ADU often recovers its full cost while a garage returns 60–85% and a pool house 50–65%. Dig into each in the ADU feasibility guide, the guest house vs ADU guide, the detached garage cost & ROI guide, and the backyard office & pool house guide.

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