The Discount Rate and Developer's Profit


The discount rate is used to convert the anticipated future cash flows to a present value. It reflects the risks and timing of the cash flows and can consist of equity or a blend of equity and debt position requirements. Further, the discount rate may or may not include the developer's profit, which is often expressed separately as a percent of sales and deducted from the cash flow as a line item expense.  


The example below shows the components for a blended discount rate and assumes the Developer's Profit has already been deducted from the cash flow as a line item expense.

Lender Rate X LTV
Developer x 1-LTV
Equals = Blended Rate

7.0% x 30% = 2.1%
12.0% x 70% = 8.4%
Blended Rate = 10.5% 

If Developer's Profit was not previously deducted, it would be appropriate to increase the discount rate to reflect this component. 

Comments