Cost overrun and equity gap calculator
This calculator applies a cost overrun percentage to an original budget and holds the loan commitment fixed. It answers one question: how much new equity does the sponsor have to find to close the gap?
Calculator
| New total budget | |
|---|---|
| Overrun in dollars | |
| Additional equity needed | |
| Increase over committed equity | |
| Loan as share of new budget |
Formulas
- New budget = original budget x (1 + overrun)
- Additional equity = new budget - loan commitment - equity committed, floored at zero (assumes the loan cannot increase)
- Loan share of new budget = loan / new budget
Worked example with the starting inputs
With the starting inputs in the form (original total budget $10,000,000; loan commitment (fixed) $6,000,000; equity committed $4,000,000; cost overrun 12 percent), the results are: new total budget: $11,200,000; overrun in dollars: $1,200,000; additional equity needed: $1,200,000; increase over committed equity: 30.0 percent; loan as share of new budget: 53.6 percent.
These inputs are hypothetical and are shown only so the arithmetic can be checked by hand.
What a cost overrun means for the capital stack in a real deal
The lender has stopped at its commitment. Everything above that line lands on equity.
The appraiser’s stabilized value does not rise just because spending did, so the extra dollars may earn little additional return.
How to read and stress the result
Start with the additional equity figure, then ask who funds it. If the sponsor holds the guaranty, the loan agreement may require the shortfall to be deposited before the next draw. Test the overrun input at several levels and watch how fast the equity call grows, because every dollar of extra cost is a dollar of equity. Compare the new loan share with the term sheet. Then recalculate yield on cost using the larger budget, since the same net operating income divided by a bigger cost gives a lower yield. Debt service coverage changes only if net operating income or debt service changes, and the exit cap rate is a market assumption to model separately.
Small changes show how thin the cushion is. A contingency line in the budget may absorb small changes before any call on the limited partners.
Where the result misleads
The calculator assumes the loan cannot increase, and the floor at zero means a negative gap is shown as no additional equity. Real loan agreements differ. Some construction loans carry a completion guaranty or a cost overrun guaranty, while others allow a modification if the lender’s appraiser supports a higher value. Mezzanine debt or preferred equity may fill the gap at a price this tool ignores. The tool treats the overrun as a single percentage on the whole budget, although hard costs and soft costs behave differently, and a delay adds interest carry.
It also says nothing about value. If the appraiser’s number or the cap rate moves, the lender may resize the loan lower, and the real gap grows beyond this output.