Every pro forma looks good until interest rates hit 7% and construction costs jump 15% – here’s stress-testing that works:

Reviewed a developer’s model last week.

Gorgeous spreadsheet.
Color-coded. Perfectly formatted.

Completely useless.

Why?
Because it assumed 2022 conditions would last forever.

They didn’t.

How to Build a Model That Survives Reality:
The 3-Scenario Rule:
Stop building one perfect model.
Build three:

1️⃣ Base Case (50% probability)

→ Current market conditions
→ Normal permitting timeline
→ Your best cost estimates

2️⃣ Conservative Case (35%)

→ Interest rates +2%
→ Construction costs +15%
→ Lease-up/sales take 50% longer
→ Add a 6-month delay

→ If your deal dies here… don’t do the deal.

3️⃣ Stress Case (15%)

→ Interest rates +3%
→ Construction costs +25%
→ Market downturn mid-project
→ 12-month delay + carrying costs

Interest Rate Reality Check:
→ Your model should work at 10%+ rates.

→ Test this:

Construction loan at current rates + 1-2% buffer

Refi assumptions at today’s rates

Permanent debt at realistic terms

If your deal only works at 4% rates…
You’re gambling, not developing.

Construction Cost Inflation Buffer:
→ 15% escalation for any project starting 12+ months out
→ Line-item inflation for:

Steel

Lumber

Electrical
→ Labor premiums for tight markets

Bottom Line:
If your model doesn’t survive Scenario 2…
It won’t survive the real world, unless you are the government that built that nice train station and can double the budget at someone else’s dime. 😉