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Multifamily residential is a rental income property that contains multiple separate housing units. A multifamily building generally has one owner, or landlord, that rents units to residential inhabitants, or tenants. If a multifamily residence is sold, it is sold in its entirety or, alternatively, converted to condominium.

Financial analysis for a multifamily project is similar to that of all income properties. The back-of-envelope (BOE) calculation uses crude rents, expenses, costs, and vacancies to conduct a preliminary evaluation of the deal and see if the property will perform as expected. The BOE is used to develop one simple return measure common to all income properties -- return on cost (ROC) -- in order to compare and select different development options.

Here are some useful financial terms used in multifamily development projects:

Multifamily Gross Income

The annual income generated from multifamily units rental rates.

Multifamily Key Performance Indicators (KPIs)

In our software, there is a top bar with a series of KPIs specific to multifamily analysis; you will find three useful metrics.

  • Multifamily Average Sale

    Multifamily Average Sale is the average rent price based upon the unit mix available. For example, if you have 50 one-bedroom and 50 two-bedroom units rented at $2,500 and $3,000, the multifamily average sale is $2,750 per unit.

  • Multifamily Average Unit Size

    Multifamily Average Unit Size is the average size of the unit mix. If the same one- and two-bedroom units in the previous example are 750 square feet and 800 square feet, the multifamily average unit size is 775 square feet.

  • Multifamily Average Rent PSF

    Multifamily Average Rent PSF is the average sale divided by the average unit size. Combining the two examples above, the multifamily average sales PSF for one and two-bedroom units is $3.55 per square foot.

Other General Terms

Basic Types of Leases

  • Gross Lease

    Gross lease is the simplest. The tenant pays a stated amount of rent each month. This amount includes the basic expenses, such as maintenance, taxes, and insurance.

  • Triple Net lease (NNN)

    Triple Net lease (NNN) is the reverse. The tenant pays a base rent  but is responsible for the costs of using the space. This lease is generally used when there is only one tenant. If there are multiple tenants, an estimated percent of the expenses is included in the lease. If the expense payments exceed the estimated amount, this amount is reimbursed back to the landlord.

Expense Reimbursement

When a tenant is responsible for the operating expenses of a property, for example in a triple net lease (NNN), the landlord may choose to pay the operating expenses in advance and be reimbursed by the tenant at a later time.

Loss Factor

Loss factor is the percentage of the leasable or rentable area that is not usable by the tenant, because it contains things like service closets, trash rooms, vertical and horizontal circulation such as corridors and passageways, lobbies, and the like.


This is the percentage of the units or space that is not expected to be rented or leased. Examples include the time between tenants or the time required to improve the unit or property.

Operating Expenses (OpEx)

OpEx generally includes maintenance, taxes, and insurance.

Net Operating Income (NOI)

Net operating income is the revenue from the property minus vacancy rates and operating expenses.

Hard Cost

Hard cost is the cost of all physical assets plus labor associated with the construction of a project. Hard cost excludes land purchase, and in our software we have also excluded demolition cost. Demolition and land purchase are individual sliders in our project cost panel.

Our software breaks down hard costs by usage; for example, office and retail each have a dedicated cost slider. We also include a bolded value, to the right of the hard cost section of the project cost panel, which is the average cost per square foot for the entire project. This takes into account individual hard cost values and the square foot amount of each use.

Soft Cost

Soft cost accounts for expense items that are not considered direct construction costs, such as architecture, engineering, financing, and legal.


Contingencies refers to the percentage of the total cost, including hard and soft costs, that is allocated for unexpected events during the course of construction. Common examples are construction cost overruns and change orders.

Total Project Cost

The project cost is to the total cost of the development project, including hard and soft costs, contingencies, demolition, purchase price, and parking reduction fees (if applicable).

All-In Cost Per Square Foot (PSF)

The all-in cost per square foot is a standard measure of the project cost in order to compare similar projects or different versions of the project. This number is calculated by dividing the total project cost by the total buildable area.

Return on Cost (ROC)

Return on Cost (ROC) is a performance metric used to evaluate or compare development projects. The most basic ROC calculation is income minus expenses and vacancies, also known as net operating income, divided by total project cost.

If the ROC of a development project is attractive, then it makes sense to dive deeper into the analysis process with a ten-year pro-forma. Deepblocks will integrate the ten-year pro-forma with later versions of the software.