A building that has not started construction does not look like it is costing anyone anything. The lot is fenced, the drawings are finished, and the developer is waiting for a hearing date or a permit review. But a development project is a set of financial commitments that began the day the land was purchased, and those commitments keep running whether or not the excavator has arrived. This article puts a price on twelve months of waiting.
We use Reference Project B, the podium project, with every assumption listed at the end of this article: an illustrative 120-unit mid-rise over a structured garage, with a total development cost of $30,000,000, which needs a rent of $2,415 per unit per month to cover its debt, its equity return and its operating expenses. A line-by-line walk through the same arithmetic is in Why a new apartment costs $2,000 a month, which runs it on Reference Project A, the site's cheaper garden building with surface parking, and lands on $1,996; the sequence from land purchase to lease-up is described in How housing gets built. In our scenario the developer has bought the land and is waiting for entitlements and building permits. Construction start slips by twelve months. Nothing about the building changes: same units, same design, same contractor. Only the calendar moves.
The answer, under the assumptions laid out below, is that the year costs $1,265,200 in cash and escalation, which converts into about $71 per month of additional required rent on every unit. That figure excludes several costs that never appear on a budget line, which we take up in the second half of the article.
A project that is waiting still spends money
Carrying costs are the expenses a project incurs simply by existing over time: interest on borrowed money, taxes on land, insurance, and the salaries and fees of the people keeping the project alive. During a delay they accumulate with nothing to show for them. We group the cost of the year into five categories, four of them cash and one of them a price change that arrives later.
Interest on the land loan
We assume the $3,600,000 of land was bought with a land loan covering 50% of its price, or $1,800,000, at 9% interest. Land loans are priced higher than construction or permanent loans because the collateral produces no income. A lender's only path to repayment is the eventual construction of something on the site, or a sale of the dirt, and it charges for that uncertainty. At 9%, twelve months of interest on $1,800,000 is $162,000, or $13,500 per month. We assume the loan is interest-only, so none of that payment reduces the balance.
Property taxes on the land
Land is assessed and taxed whether or not anything is happening on it. We assume a tax rate of 1.2% of land value, which on $3,600,000 is $43,200 for the year, or $3,600 per month. The finished building will pay far more in property tax than the bare lot does, and the difference between the two is one of the reasons a city has a financial interest in the project being built. The point of the delay is that the tax on the land is paid without any rent to pay it from.
Insurance, security and maintenance
A vacant site needs liability insurance, a fence, occasional security, weed control and stormwater compliance. We assume $30,000 for the year, or $2,500 per month. It is the smallest line on the list, and it is included because it is real: a site the developer stops maintaining becomes a code violation, and a site that is not insured is a liability the lender will not accept.
Extended pre-development spending
A delay is rarely twelve months of silence. It usually means revised drawings, re-submittals, additional traffic or environmental studies, more attorney hours, more consultant invoices, and the developer's own staff continuing to work this project rather than the next one. We assume $250,000 of additional pre-development spending over the year, or $20,833 per month. Some of that is the cost of responding to whatever caused the delay, and some is the cost of keeping a team in place while it is resolved. These are soft costs in the language of a budget, and they are added to a soft-cost line that the base project already carries at $3,300,000.
Construction cost escalation
The largest item is the one that is easiest to overlook, because no check is written for it during the year. The project's hard costs, the construction contract itself, are $19,500,000. We assume construction prices rise 4% over the year of delay. A contractor's bid that was good at the original start date is not good twelve months later; materials, labor and subcontractor pricing have moved, and the general contractor will re-price the job before signing. The project therefore pays $780,000 more for exactly the same building, or $65,000 for every month it waited.
Escalation is a price the project pays on money it has not spent yet. That is what makes it different from the other four categories, which are cash going out the door month by month. The developer does not feel escalation until the contract is re-priced, at which point it arrives all at once, and it is by far the biggest single consequence of the wait.
| Category | Basis | Per month | 12 months | Rent impact per month |
|---|---|---|---|---|
| Land loan interest | $1,800,000 at 9%, interest-only | $13,500 | $162,000 | $9 |
| Property taxes on land | 1.2% of $3,600,000 | $3,600 | $43,200 | $2 |
| Insurance, security and maintenance | Vacant-site carry | $2,500 | $30,000 | $2 |
| Extended pre-development | Staff, consultants, legal, re-submittals | $20,833 | $250,000 | $14 |
| Construction cost escalation | 4% of $19,500,000 hard costs | $65,000 | $780,000 | $44 |
| Total | $105,433 | $1,265,200 | $71 |
Add the five categories and the year of waiting costs $1,265,200, or $105,433 per month. Divided across the days of the year, the delayed project costs $3,466 every day it sits. None of that money buys an additional square foot, a better finish or a larger unit. It buys the same building, later.
Where a year of delay goes
See the numbers
| Category ($ thousands) | Delay cost |
|---|---|
| Land loan interest | $162 |
| Property taxes | $43 |
| Insurance and security | $30 |
| Extended pre-development | $250 |
| Construction cost escalation | $780 |
Turning carrying cost into rent
A cost that lands on a project does not vanish. It is added to the total development cost and has to be paid for the same way everything else in the building is paid for, by rent. The rent-math used across this site converts any capital cost into a monthly rent requirement. The $1,265,200 is financed like the rest of the project: 65% with debt at 6.5% interest amortized over 30 years, and 35% with equity that requires an 8% annual return. The net operating income needed to service that capital is grossed up for a 5% vacancy allowance and then spread across 120 units and twelve months.
$1,265,200 → 65% debt $822,380 + 35% equity $442,820
Debt service $62,381 + equity return $35,426 = required NOI $97,807
$97,807 ÷ 0.95 vacancy factor = required revenue $102,955
$102,955 ÷ 120 units ÷ 12 months = $71 per unit per monthDebt service uses the site-wide mortgage constant for 6.5% over 30 years; equity return is 8% of the equity share.
Seventy-one dollars is 3.0% of the base rent. The required rent moves from $2,415 to $2,486. Line by line, the land loan interest adds about $9 per month, the property taxes and the insurance about $2 each, the extended pre-development spending $14, and the escalation $44. Escalation alone is more than half of the total, which is why the assumed escalation rate is the single most important number in this article.
12-month delay before construction start
+$1,265,200
+$71/month
Twelve months of delay before construction start
- $1.3M
- 120
- $10,543
- $102.9K
Estimated rent impact
+$71/month per unit
Computed with the site-wide rent-math defaults (65% loan-to-cost, 6.5% interest, 30-year amortization, 8% equity yield, 5% vacancy).
Change the variables
See the assumptions
- 65% of the cost is financed with debt (loan-to-cost)
- 6.5% interest rate, amortized over 30 years
- 8% annual cash-on-cash return required on the 35% equity share
- 5% vacancy and collection loss
- Costs are spread across every unit and expressed per month
| Debt | $822,380 |
|---|---|
| Equity | $442,820 |
| Annual debt service | $62,376 |
| Annual return on equity | $35,426 |
| Required net operating income | $97,802 |
| Required revenue (after vacancy) | $102,949 |
| Per unit, per year | $858 |
| Per unit, per month | $71 |
Whether the market will pay $2,486 instead of $2,415 is a separate question, and it is the question that decides whether the project proceeds. If comparable buildings lease at $2,415, the delayed project either accepts a lower return than its investors signed up for, finds a way to remove $1,265,200 from a budget that has already been through several rounds of cuts, or does not get built.
The costs that do not appear in the budget
The $1,265,200 is what an accountant would capitalize into the project. Four further costs are just as real and are harder to see, because none of them produces an invoice.
The equity that sat still
By the time the land closed, we assume the developer's investors had already put $1,800,000 of equity into the land (the half not covered by the land loan) and $1,000,000 into pre-development work: design, engineering, studies and applications. That $2,800,000 sat for a year producing nothing. At the 8% yield those investors expect, a year of nothing is $224,000 of return they were promised and did not receive.
No budget line records the $224,000, and it is not included in the $1,265,200 above. It shows up instead as a lower internal rate of return when the project is eventually sold or refinanced, because the same dollars took a year longer to come back. Investors remember that. They price the possibility of such delays into the returns they require of the next project, which is one of the reasons investors require a yield like the 8% assumed here rather than something lower, and one of the reasons a jurisdiction with a reputation for slow approvals tends to face a higher cost of capital for everything built in it.
Not included in the $1,265,200; appears as a lower IRR rather than a budget line
The rent that was never collected
The 120 households who would have moved in wait a year. At the base rent, the gross revenue the building would have collected in that year is $3,476,883. It is tempting to call that the cost of the delay, and it is not. The project did not pay operating expenses or debt service during that year either, so the missing revenue is offset by missing costs. The true loss to the project is the time value of the equity described above. The loss to the city is a year of housing that was not delivered, which is not a line in anyone's pro forma but is the reason anyone outside the industry cares about the question.
The interest rate that was not locked
During the delay the permanent loan rate is not locked. A lender does not commit a rate on a building that may not be built for years. The rent-math assumes 6.5%. If rates rise half a percentage point, 50 basis points, to 7.0% while the project waits, annual debt service on the $19,500,000 loan rises from $1,479,039 to $1,556,808, an increase of $77,769 per year, or another $57 per month of required rent on top of the $71. If rates fall half a point, the project gains $56 per month and some of the delay cost is recovered.
Delay converts a known rate into a bet, and the bet can go either way. What the developer cannot do is underwrite around the uncertainty; the lender will size the loan to whatever rate prevails when it closes, and a project that only works at 6.5% is a project that may not close at 7.0%. What happens when interest rates rise 1 percent works through the full sensitivity.
The projects that do not survive
Not every delayed project is eventually built. We assume, for illustration, that one in five projects a developer pursues dies after $1,000,000 of pre-development spending, killed by a denial, a lawsuit, a change in the market or a partner walking away. The four survivors have to carry the dead project's cost, $250,000 each, because a development company recovers its losses from its successes or it stops existing. This is one reason developer fees and required returns are the size they are, a point taken up in Does developer profit make housing unaffordable?. The longer and less predictable the approval process, the higher the death rate, and the more each surviving building has to pay for the ones that did not make it.
Why a second year costs more than the first
Delay cost is not linear. Extend the wait to twenty-four months and the four cash categories simply double, from $485,200 to $970,400. Escalation does not double; it compounds. Four percent a year for two years is 8.16%, so the hard costs rise by $19,500,000 × (1.04² − 1) = $1,591,200 rather than $1,560,000. The two-year total is $2,561,600, which the rent-math converts into $145 per month of required rent, more than twice the $71 of the first year.
A two-year delay
Cash carry $970,400 + compounded escalation $1,591,200 = $2,561,600, or $145 per month of required rent. The first year adds $71; the second adds $74.
Two things bend the curve upward. Escalation compounds, because each year's price increase applies to a base that already includes the prior year's. And exposure to interest rates lengthens: a project that is two years from closing its loan has twice as much time for rates to move against it, and the ±$57 swing described above becomes a wider range. A third effect is harder to model and probably larger than either: the longer a project sits, the more likely something in the market, the capital stack or the partnership changes enough to kill it outright.
Reference Project B (the podium project): an illustrative 120-unit mid-rise over a structured garage of 120 spaces; total development cost $30,000,000 ($250,000 per unit); operating expenses $8,200 per unit per year; required rent $2,415 per unit per month. Why this project: a delay is priced off the land, the hard-cost contract and the pre-development budget, all of which this project states as round figures. Both reference projects are defined side by side on our Methodology page.
Budget: land $3,600,000; hard costs $19,500,000 (including 120 structured parking spaces at $30,000 each); soft costs $3,300,000, of which permit and impact fees are $1,440,000; developer fee $1,200,000; financing costs $1,800,000; lease-up and operating reserves $600,000.
Financing at the site-wide defaults: 65% loan-to-cost ($19,500,000 of debt) at 6.5% interest amortized over 30 years; 35% equity ($10,500,000) at an 8% target cash-on-cash yield; 5% vacancy; operating expenses of $8,200 per unit per year ($984,000), of which property taxes are $2,500 per unit. Required gross revenue $3,476,883. Base required rent is $2,415 per unit per month ($1,081 debt service, $614 equity return, $719 operating expenses).
We assume the delay occurs after the land has closed and before the construction loan closes, so no construction-period interest accrues during the wait.
We assume the land was bought with a 50% land loan of $1,800,000 at 9% interest, interest-only, and $1,800,000 of equity.
We assume property taxes on the land at 1.2% of a $3,600,000 land value, or $43,200 per year.
We assume $30,000 per year for insurance, site security and maintenance of the vacant site.
We assume $250,000 of additional pre-development spending over the twelve-month delay (staff time, consultant and legal fees, plan revisions and re-submittals).
We assume construction cost escalation of 4% per year, applied to the $19,500,000 of hard costs only.
We assume $1,000,000 of pre-development spending, funded by equity, had been made before the delay began, so $2,800,000 of equity was deployed and idle during the year.
For the interest-rate sensitivity we assume the permanent loan rate moves 0.5 percentage point in either direction from 6.5% while the project waits.
For the entitlement-risk illustration we assume one in five projects a developer pursues dies after $1,000,000 of pre-development spending.
Rent impacts use the site-wide rent-math: annual debt service is the mortgage payment on the capital cost times the loan-to-cost ratio at the interest rate over the amortization period; annual equity return is the capital cost times the equity share times the target yield; required NOI is the sum; required revenue is required NOI plus operating expenses divided by one minus the vacancy rate; and required rent per unit per month is required revenue divided by units and by twelve. Since the delay adds no operating expenses to the finished building, only the capital portion of the formula applies to the $1,265,200. Nothing is rounded internally; the figures shown are rounded from the unrounded calculation, which is why the per-item rent impacts sum to the total only approximately.
Escalation is applied only to hard costs. Soft costs also escalate over time, since professional fees and permit fees move with the market, but we ignore that here; the effect is to understate the delay cost somewhat. The land loan is assumed to be interest-only, which is how such loans are commonly structured, so the balance does not change during the year.
The equity time cost of $224,000 is not capitalized into the $1,265,200 and is not run through the rent-math. It is a return the investors expected and did not receive, and it reduces the project's realized IRR rather than adding to its budget. The lost gross revenue of $3,476,883 is likewise not treated as a project cost, because the operating expenses and debt service that revenue would have paid were also not incurred.
The delay is assumed to occur before the construction loan closes. A delay that occurs after the construction loan has funded, with interest accruing on a drawn balance, is a different and considerably more expensive scenario, noted below under what would change the answer.
Nothing here is drawn from an outside data set. The $1,265,200 is arithmetic performed on the assumptions listed above, and those assumptions are ours: a modeled project, a modeled land loan, a modeled escalation rate. The two inputs that move the answer most are how long approvals actually take and how fast construction costs are rising, and both differ sharply by jurisdiction and by year. A reader pricing the delay on a real project should take the timeline from the local permitting record and the escalation from current local bids rather than from this article.
The escalation rate. Escalation is $44 of the $71. If construction prices are flat during the wait, the delay costs $27 per month; if they rise faster than 4%, escalation quickly dominates everything else.
Whether the land is financed or bought with cash. A developer who owns the land outright pays no land loan interest and the cash cost falls by $162,000, but the equity time cost rises, because $3,600,000 of equity rather than $1,800,000 is sitting idle.
Property tax treatment of the land. A jurisdiction that assesses vacant or entitled land at a higher rate, or one that abates taxes during construction, moves the $43,200 in either direction.
A locked rate. If the developer had a rate lock or a forward commitment from the lender, the ±$57 interest-rate exposure disappears, though lenders charge for that protection and rarely extend it across a long entitlement period.
Delay occurring mid-construction. If the twelve months are lost after the construction loan has funded, interest accrues on the drawn balance, the general contractor charges extended general conditions, and the cost of the same delay is several times larger than the figure modeled here.
A market where rents rise during the wait. If achievable rents move up while the project waits, the higher rent offsets part or all of the delay cost, and the developer may end up no worse off. The reverse is also true.
A project that dies. If the delay ends in a denial or a withdrawal, the cost is not $1,265,200 but the entire pre-development spend plus the land carry, with no building to recover it from.
What this means
The delay did not change the building. Same 120 units, same parking, same finishes, same contractor. It changed the rent, by $71 per month under our assumptions, and by considerably more if rates moved or the wait stretched into a second year. The cost is paid by one of two parties. If the market will bear $2,486, future tenants pay it, every month, for as long as the building stands. If the market will not, the project is not built, and the cost is paid in housing that does not exist.
Approval timelines are usually discussed as a matter of process: how many hearings, how many rounds of review, how long a permit takes. They are also a policy variable with a price. A jurisdiction that takes a year longer than its neighbor to approve the same building is, in effect, adding $71 per month to the rent of every unit in it, or screening out the projects that cannot absorb the increase. Whether that price buys something worth having, in better design, more public input or fewer mistakes, is a question this article does not try to settle. It only tries to show the number.
Delay is one of several levers that determine what a new apartment has to rent for. The others, land, construction cost, parking, fees, financing and the return on equity, are laid out together in Why can't developers build cheaper apartments?.