Demystifying Development: Does It Pencil?

Summary

Developers and housing professionals say it all the time: development projects have to “pencil”, but what does that mean?‍Essentially, the project has to make financial sense in order for a developer to move forward with the creation of new housing.‍ Because most developers rely on a combination of bank loans and equity investment, they must be able to show that their project can both repay their loan and satisfy investor requirements. To do that, developers calculate the cost to build new homes - for example, the total cost of lumber, architects, city fees, and taxes - and assess that against what those homes can be rented or sold for once completed. A project “pencils” when a developer concludes that they can build new homes at a cost and sales/rental price that allows them to pay back their debt and make their equity partners a good return. If costs are too high, or anticipated revenue is too low, then the project does not pencil and will not get built.