In a typical levered development project, you have months of cash outflows followed by a number of months of lender contributions and then you'll start your lease up period in which you'll, hopefully, have positive cash flows.
However, when raising capital for a fully-entitled development (I'm talking ~10MM TDC range, so I'm not dealing with Carlyle as an LP here), your investors will be contributing all capital (except for capital calls) at Time 0 (closing). So which way is used when calculating the IRR? Technically, no money is spent until it goes toward paying for project costs, however, it's already out of your investors' pockets and sitting in the bank account. Comparatively, in a value-add acquisition, you have your Time 0 negative outflows, and then all periods after are separate. In most value-add models, I see the outflows treated all-the-same at Time 0, whereas this seems to differ in development models.
Depending on how this is classified in a development model, it can lead to wildly different IRRs. It's not something I had given much thought to until I was getting a 20%+ IRR and 2x+ MOC on a project I'm modeling and then did an NPV calculation and got a negative result at a 20% discount rate. So I compared =-Equity at Time 0 vs negative outflows across months and that's where the difference was; something like a 16% IRR vs a 21% IRR.
So, how is this treated in partnership documents and what's the right way to think about this? The difference is a feasible project versus not-even-close.
Would appreciate input from those who have experience with partnership docs.
EDIT: After writing this out, part of this sounds like a dumb question but I still want your answers. My confusion is largely between NPV and IRR on these projects: so are LPs' using different discount rates? Their OCC is, hypothetically, 20% if that's the hurdle rate they invest at across all projects. Yet, the NPV is all wacky. Or maybe I'm just doing the NPV calcs wrong.