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Typically, the costs to develop a property development project is funded through a combination of debt and equity. The use of debt enhances the returns to project owners and investors. The debt used in a property development project can take the form of 1st tier debt (i.e. the lender(s) are provided a 1st mortgage and security over the property registered on the property title) and 2nd tier debt (ie the lender(s) are provided a 2nd ranking mortgage and security over the property which may be registered on the property title or unregistered). 2nd tier debt will generally be offered a higher rate of interest due to the subordinated level of security and the higher risk in the event of default. In both forms of debt, a Special Purpose Vehicle (SPV) may be established to raise funds from a group of non-related investors = syndication. The investor funds are pooled together and the SPV then lends these funds to the entity undertaking the property development project. The security is held for the benefit of all the investors and interest returns are shared proportionately amongst the investors. In some circumstances an independent Security Trustee may hold the security on behalf of the grouped investors and will act on their instructions in the event of a default on the loan by the lender.

Return on Equity (ROE) is calculated by dividing the Net Income by the shareholders’ equity. Typically,  when leverage is used on a profitable investment, the ROE will be increased.

Net present value (NPV) is used in capital budgeting and investment planning to analyze and compare the profitability of potential investments. NPV is the difference between the present value (discounted using an appropriate discount rate) of cash inflow and outflows over a period of time.

A positive Net Present Value would generally represent a worthy investment. In general, for any two investments with similar risk levels, the investment with a higher NPV is the more profitable investment.

The IRR (also known as Money-Weighted Rate of Return) incorporates the size and timing of all cash inflows and outflows. This is particularly important in real estate investments because unlike other asset classes such as equity or fixed income products, cash flows in real estate can come in unorthodox sizes, at irregular timings.

By using a metric (IRR) that accounts for irregular cash flows, an investor is able to compare the return profile of the real estate investment with that of the other traditional asset classes.

IRR ( Internal Rate of Return) is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis. 

To put simply, the IRR of an investment would be the compounded annual return of the investment, assuming all interim cash flows (if any) are reinvested at the same rate. Generally, the higher the internal rate of return, the more desirable an investment is.

A bond is a fixed income instrument representing a debt obligation between the issuer (borrower) and the bondholder (lender). The indenture states all the details of the loan: maturity date, face value, coupon rate, and the frequency of coupon payments.

Typically, the owner (lender) of a bond receives 2 semi-annual coupon payments a year, and the face value of the bond is due to be paid back by the borrower on the maturity date. For instance, a $1,000 face value 10-year bond with a 5.0% coupon rate pays two $25 coupon payments a year, and the face value of $1,000 is redeemed at the end of 10 years.

LTV is a financial ratio used by lenders to express the ratio of a loan to the value of an asset purchased. In Real estate, this term is commonly used by banks and lenders to represent the ratio of the first mortgage line as a percentage of the total value of the property.

The capitalization rate (or cap rate) is used in commercial real estate to estimate the potential rate of return generated on a real estate investment property. 

Capitalization rate is calculated by dividing a property’s net operating income by the current market value.

This ratio, expressed as a percentage, is an estimation for an investor’s expected rental yield on a real estate investment, assuming it is purchased entirely in cash.