---
title: Solving for the lot
description: The four inputs to a lot basis are land, horizontal, financing and profit. Most builders can price three of them. The fourth is what takes deals down.
image: https://structurelend.com/hubfs/featured-image-solving-for-the-lot.png
---

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# Solving for the lot

![Dave Guiness](http://7528315.fs1.hubspotusercontent-na1.net/hub/7528315/hubfs/raw_assets/public/mV0_d-cms-elevate-theme_hubspot/elevate/images/avatar-placeholder.jpg?width=48&height=48&name=avatar-placeholder.jpg)

 Dave Guiness

September 21, 2026

Start with the assumption, because it changes the math: a mid-size builder developing lots for his own supply. Not a land developer selling finished lots to someone else. A builder who will put his own houses on this dirt.

That builder has one question in front of a piece of land. What can I pay for it?

You cannot answer it from the land side. You answer it from the house.

## Solve the vertical first

If the market supports an $800,000 home, that number is the constraint and everything else is subtracted from it.

|   | % of sales | On an $800,000 home |
| --- | --- | --- |
| **Sales price** | 100% | **$800,000** |
| Less: lot cost | 25% | $200,000 |
| Less: vertical budget | 53% | $424,000 |
| Less: financing cost | 5.5% | $44,000 |
| Less: sales and closing costs | 6.5% | $52,000 |
| **Net margin** (profit ÷ sales price) | **10%** | **$80,000** |

 

**![lot-economics-diagram](https://structurelend.com/hubfs/lot-economics-diagram.png)**

Those percentages move by market, product type and builder. The structure does not. Sales price is set by the market. The vertical budget is set by what it costs to build. Sales and closing are set by convention.

Which leaves the lot as the residual. **It is an output, not an input.**

### A word on which margin that is

Analysts covering the public homebuilders track **gross** margin. It is the right number for comparing large builders against one another, and it is what gets discussed on an earnings call.

Banks underwriting mid-size and large private builders track **net** margin — the number at the bottom of this stack. Profit divided by sales price, after financing and after sales and closing costs.

If you are benchmarking your deal against public-company gross margins, you are measuring against a number built on a different basis than the one your lender is underwriting to.

One more piece of precision. The stack above is **project-level** — it runs to the margin the deal itself throws off. The version that matters to your lender goes one line further and subtracts company overhead, so the net profit line on the credit presentation that goes to committee is your project margin less SG&A. A project margin in the low double digits can land in the low single digits once overhead comes out. Know both numbers and know which one you are quoting.

## Then back into the lot

The lot number itself gets built from four pieces:

**(1) Land + (2) horizontal + (3) financing + (4) profit = total lot cost ÷ number of lots = cost per lot**

![horizontal-to-vertical-diagram](https://structurelend.com/hubfs/horizontal-to-vertical-diagram.png)

Note what the diagram shows: the horizontal analysis produces a cost per lot, and that cost per lot *is* the first line you subtract on the vertical side. Two analyses, one number joining them. You cannot finish the second until you have finished the first.

Note also that **financing appears on both sides.** Once in the lot you are buying, once in the house you are building. Hold that thought.

## Why mid-size builders get burned on dirt

I have seen sponsors run this exercise and still get hurt, and the reason is usually competitive rather than arithmetic.

National and publicly traded builders pay more for the same dirt. Not irrationally — their inputs genuinely differ. Their financing costs are lower. Their required profit margin per unit is thinner, because they are running volume. They have economies of scale, and they have standing relationships with land developers, which often means seeing the deal earlier and on better terms.

Run those inputs through the same subtraction and there is more room for the lot. Their number is higher, and it is correct for them.

So if you are a mid-size builder, your financing costs are higher than a national's and your required margin is thicker. Matching their bid without re-running it against your own cost of capital is not winning a competitive deal. It is buying a loss you will not see for two years.

**The number to beat is not what someone else bid. It is what your own stack supports.**

## What it looks like when it goes wrong

I recently talked to a builder who had an acquisition and development loan with **no interest reserve** — and who did not really know what his financing costs were on the horizontal side.

The loan was underwritten to a one-year hold. It ran well past a second year.

When that happens it blows up the financing cost on **both** sides of the equation. The horizontal interest runs long. Then the delay pushes the vertical starts out, so the vertical financing runs long too. Neither overage was catastrophic alone. Together they were larger than the margin he had built in, and the deal stopped being profitable.

Nothing else failed. The land was fine. The horizontal came in near budget. He was not wrong about what the houses would sell for.

He was wrong about one input.

## The diagnosis

Go back to the four pieces of the lot cost. **Most guys know items 1, 2 and 4.** They know what the seller wants for the dirt. They have bid the horizontal work, or built enough of it to estimate closely. They know the profit they need.

**Item 3 is the one that gets estimated rather than calculated** — and that is where deals get into distress.

It gets missed because it does not behave like the others. Land is a price on a date certain. Horizontal is a scope you can bid. Both are largely fixed the moment you sign.

Financing is a rate multiplied by a balance multiplied by **time** — and time is the variable nobody controls. Entitlement that takes two extra cycles. A wet spring. A utility connection waiting on someone else's schedule.

When the hold extends, the other lines stay where they were. The financing line does not.

And look at its size relative to what you are protecting. In the stack above, financing is $44,000 against a net margin of $80,000 — **55% of the profit.** Double the hold, double the interest, and the overage on that one line takes 55% of the margin before anything else has gone wrong.

That is the asymmetry. The line carried loosest is the one large enough to take the deal.

## What to do about it

**Calculate the financing cost, don't estimate it.** Build it against a draw schedule and a real hold period, phase by phase. The number you want is total dollars of interest and fees over the actual life of the deal.

**Size the interest reserve for the hold you might get, not the one you modeled.** A reserve sized to one year on a deal that could take two is not a reserve. It is a forecast, and it is the forecast most likely to be wrong.

**Run your downside on schedule, not just on price.** Most sensitivity analysis moves the sales price and the vertical budget. Move the timeline instead — add six months and watch the financing line and the margin underneath it. That single test surfaces more distressed deals than any other.

---

None of this is exotic. It is arithmetic, and every builder reading it can do the arithmetic. The failure is not one of capability — it is that the one input hardest to pin down is the one carried loosest, right up until the schedule slips and it stops being loose.

**The number that kills the deal is usually the one nobody put in the model.**

---

*Dave Guiness is the founder of Structure Lend, an independent capital advisory practice placing debt and structured capital for homebuilders and land developers.  He has worked every side of a builder's capital stack: underwriting and originating inside the lender at Zions Bank and Builders Capital, where he underwrote $379 million and closed $311 million; then on the sponsor side as the finance seat at Black Oak Development, capitalizing Keetley Ridge from raw land through completion. That is the seat he works from now: underwriting a project the way a credit committee will see it, building the capital structure the numbers support, then finding the money that fits. He holds dual master's degrees from Texas A&M in Real Estate and Land Development. *

**Want to talk?** [801-372-8857](tel:+18013728857). Or [send me an email](mailto:dave@structurelend.com).

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---

Structure Lend LLC · South Jordan, Utah · dave@structurelend.com · 801-372-8857

Structure Lend LLC is a capital advisory firm. We structure and place debt on behalf of our clients. We do not originate, commit or fund capital, and nothing on this page is an offer to lend or a commitment to provide financing. Projects shown were financed by David Guiness in his prior capacity at institutional lenders unless otherwise noted.

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