Is there a precise term for the difference between the market value of a project and the owner's cost to build it?
If Joe spends $1.5M to build a building worth $2M and decides to hold on to it after building it, what do we call the difference between Joe's cost to build it and its market value?

If it's re-assessed and adjusted up from its book value, you could call it 'profit', but 'profit' doesn't seem precise enough here. 

What's the best term?
[{"id": "ig4xb2y", "text": "Why is it worth 2 million?", "replies": [{"id": "ig4xsk0", "text": "Hypothetical market value.", "replies": [{"id": "ig54a3j", "text": "From an appraiser? There are three forms of value. There is replacement cost, which we will say is 1.5 million, there is sales comps, which we will say is 2 million, then there is income, which is 0 because we are assuming it is empty. \n\nSo by this definition, the market value is 2 million and the cost basis is 1.5 million and the  difference is equity.", "replies": [{"id": "ig5s01g", "text": "A vacant property can be valued by the income approach.  All you are doing is valuing NOI using cap rate comps.  \n\nRemember, NOI starts with PGI (Potential Gross Income)  that number will be the same for a stabilized property and a vacant property.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ig4xtr7", "text": "Profit or entrepreneurial incentive should be close to what you're after.\n\nEntrepreneurial incentive is the reward for doing the project. It is the expected reward.\n\nDeveloper's profit is essentially the realized profit.\n\nThose two numbers might differ.", "replies": [], "depth": 1}, {"id": "ig4y3qv", "text": "I feel like \u201cequity\u201d would fit well here until he sells the property.", "replies": [], "depth": 1}, {"id": "ig4z6s2", "text": "Dollar value = developers profit\nAs a percentage = profit on cost", "replies": [], "depth": 1}, {"id": "ig4zcf3", "text": "I'd call it margin or unrealized profit.", "replies": [], "depth": 1}, {"id": "ig50eaj", "text": "Unrealized profit?", "replies": [], "depth": 1}, {"id": "ig531u4", "text": "Does the 1.5 cost to build include site acquisition? If not than the difference between construction costs and market value is what the land is worth.", "replies": [], "depth": 1}, {"id": "ig55yqm", "text": "Profit is realized.  This is closer to paper equity.", "replies": [], "depth": 1}, {"id": "ig58dcv", "text": "I typically call it the spread. The spread between their Yield on Cost and the market cap rate, as most developers are target around 150 basis points of spread but it obviously varies by deal.", "replies": [], "depth": 1}, {"id": "ig59ht8", "text": "Equity?", "replies": [{"id": "ig86n0u", "text": "Technically, if Joe spent $1.5m out of pocket (cash), then that\u2019s also equity. Think of the building as an asset. Accounting 101 teaches us that assets = liabilities + equity. But Actg 102 teaches us that equity is your initial investment plus (or minus) accumulated net income that hasn\u2019t been distributed (ie retained earnings). \n\nI think equity *may* work, but I think unrealized gains is more precise. Colloquially we could refer to it as \u201csweat equity\u201d though as it\u2019s the amount of equity in excess of amount invested that Joe would have available.", "replies": [{"id": "ig8svip", "text": "Yes this", "replies": [], "depth": 3}, {"id": "igf17f4", "text": "Ahhh yes. Very true.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ig5cdp9", "text": "Equity , it sounds like.", "replies": [], "depth": 1}, {"id": "ig5dr33", "text": "Equity", "replies": [], "depth": 1}, {"id": "ig5n57x", "text": "It is profit, it\u2019s just a non cash gain. Some profits you actually get in cash, other profits (like this one) occur on paper. You made money, you just haven\u2019t collected on it.\n\nUnder IFRS you would recognize this as a profit. Under GAAP you wouldn\u2019t recognize this as a profit, even though you probably should.\n\nEdit: grammar", "replies": [{"id": "ig74rd1", "text": "Good answer. Have an issue with the recognition though. Unrealized gains are intangible. Cash flow is tangible. To recognize gains and losses on paper with cash in or out is a mismatch. Asset could be held for life, never converted to cash, but cash went out for life on a gain never seen  Anyway, what do I know. Just my $.02\n\nJust saying I think gaap got this right.", "replies": [{"id": "ig77pz7", "text": "Thank you for the great response, I genuinely find this enjoyable to talk about.\n\nGAAP and IFRS don't equal what your paying in taxes, they are just ways of creating accurate representations for shareholders.\n\nFor example if I ran a fund, and I made my limited partners around $1 billion dollars, but I have yet to sell any of it. Would it be accurate to tell them I made them nothing because I didn't sell any stock? Of course not, all of the assets in the fund went up. However, I'm going to tell the IRS I made nothing because I had no cash flow coming in to pay the taxes with.", "replies": [{"id": "ig79f5z", "text": "I would disagree. But we're getting caught up in semantics. Rather than use the word made, you would tell your clients that the value of the asset now stands at x. That removes the connotation of profit or cash flow from the verb made. Nothing was made. The asset increased in market value.", "replies": [{"id": "ig7c0tl", "text": "PM if it's okay with you", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ig5nm4n", "text": "You're looking at \"profit\" from an accounting/income statement perspective. In direct real estate deals profit is understood as the sum of all negative and positive cash flows of a project (acquisition, development and sale) from e.g. the owner's perspective (levered or unlevered)\n\nThe most precise term you're looking for is probably the ---development spread---. That's the difference between the market cap rate and the yield-on-cost. It's expressed in percentages or basis points. NOI/market cap rate % = market value, and NOI/total development cost = yield-on-cost %. You compare the difference b/w the two.\n\nIn layman terms the market value minus the total development cost (incl. land value).", "replies": [], "depth": 1}, {"id": "ig5o69a", "text": "This is \\*not\\* equity. The equity would be all $2mm in this case (assuming Joe paid in cash to build it).\n\nThe term you are looking for is \\[unrealized\\] capital gains.\n\nhttps://kbfinancialadvisors.com/fair-market-value-vs-cost-basis/#:\\~:text=If%20you've%20got%20a,is%20based%20on%20today's%20pricing.", "replies": [], "depth": 1}, {"id": "ig5rd3i", "text": "I'd say \"equity\" in this case", "replies": [], "depth": 1}, {"id": "ig5rq8b", "text": "Off balance sheet equity", "replies": [], "depth": 1}, {"id": "ig5umgh", "text": "Depends on the situation. Equity, margin, profit/capital gain, or unrealized profit/gain are all correct in the proper context. Examples\u2026 \n\nJoe\u2019s property is worth $2MM and he owes $1.5MM. Joe has $500k in equity. \n\nJoe\u2019s margin on his last deal was $500k / 33%. \n\nJoe sold the property for $2MM and his cost basis was $1.5MM. Joe had a profit/gain of $500k. \n\n(If it\u2019s taxed as ordinary income it\u2019s profit, if it\u2019s an investment it\u2019s a capital gain, you need a good CPA to navigate the difference). \n\nJoe\u2019s property is under contract for $2MM. He has an unrealized profit/gain of $500k.", "replies": [], "depth": 1}, {"id": "ig5wz9h", "text": "The term entrepreneurial incentive refers to the \r\namount an entrepreneur expects or wants to receive \r\nas compensation for providing coordination and ex-\r\npertise and assuming the risks associated with the \r\ndevelopment of a project. \n\nIn contrast, entrepreneurial profit refers to the difference between the total cost of development and marketing and the market value of a property after completion and achievement of stabilized occupancy and income.", "replies": [], "depth": 1}, {"id": "ig61x8o", "text": "Development spread is what I would call it", "replies": [], "depth": 1}, {"id": "ig64hgg", "text": "It's just like if it cost you 20k to build a shed and you sell it for 35k....", "replies": [], "depth": 1}, {"id": "ig69b2a", "text": "In single-tenant development, we refer to this as the \"cap spread\" i.e. the delta between construction costs / cap and stabilized (market) value/ cap. Unrealized equity is a good term as others have mentioned.", "replies": [], "depth": 1}, {"id": "ig6b5pr", "text": "Entrepreneur profit.\n\nhttps://codes.findlaw.com/ca/revenue-and-taxation-code/rtc-sect-401-6.html#:~:text=(1)%20%E2%80%9CEntrepreneurial%20profit%E2%80%9D,with%20respect%20to%20that%20property.", "replies": [], "depth": 1}, {"id": "ig6f4qt", "text": "For tax purposes, once Joe sells it, the precise name is capital gain, with a known value. \n\nBefore he sells, you might call it unrealized capital gain, but of uncertain value. There is no reason for it to have a name since there is no gain until it is sold.", "replies": [], "depth": 1}, {"id": "ig6j7bj", "text": "Unrealized equity", "replies": [], "depth": 1}, {"id": "ig70sc0", "text": "In the UK, property developers and lenders call it \u2018development profit\u2019. If you used that terminology over here anyone experienced in such matters would understand you.", "replies": [], "depth": 1}, {"id": "ig72tic", "text": "Stabilized Market value less cost to acquire, entitle, and construct = profit margin", "replies": [], "depth": 1}, {"id": "ig73vwx", "text": "It\u2019s not profit until you sell it.  Equity is the closer term, but any cash you contributed is also \u201cpaid in\u201d equity, so that\u2019s not perfect either.  We call the difference between cost and value \u201cvalue creation\u201d at my company!", "replies": [], "depth": 1}, {"id": "ig7ficu", "text": "Implied equity, these answers are all wrong.", "replies": [], "depth": 1}, {"id": "ig7hu6t", "text": "I was also going to say \u201cimputed equity\u201d as a commenter right before me stated. That\u2019s how I\u2019ve always referred to it. Doesn\u2019t have to be a development deal either. Any value creation on paper that hasn\u2019t been \u201crealized\u201d can be referred to as imputed equity.", "replies": [], "depth": 1}, {"id": "ig7lne7", "text": "Definitely not fucking profit, unless you sold for 2 Mill. Equity seems closest.", "replies": [], "depth": 1}, {"id": "ig7rmxe", "text": "Don't know, but I'd say something like value add(ed) equity.", "replies": [], "depth": 1}, {"id": "ig7taan", "text": "Sweat equity\n\nThis is the increase in value due to the work you put in", "replies": [], "depth": 1}, {"id": "ig8euxw", "text": "Unrealized capital gain. \n\nIn March 2022, Biden proposed a new tax on unrealized capital gains. It didn't happen. https://taxfoundation.org/biden-billionaire-tax-unrealized-capital-gains/", "replies": [], "depth": 1}, {"id": "ig8s5zx", "text": "Carrying Value? Appreciation?", "replies": [{"id": "ig8sr66", "text": "Might be Holding Gain.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ig9bchp", "text": "Similar concept to appraisal surplus. Which is the difference between what something cost you at a certain point in time and what you now believe it's worth. As a lender we'd normally use this to determine your land equity when dealing with land refinancing and construction lending. I'd lean on implied/imputed equity for completed projects.", "replies": [], "depth": 1}, {"id": "ig9hs22", "text": "Equity if the 1.5m is a liability in the form of a construction loan.\n\nUnrealized Gain if the 1.5m was cash.", "replies": [], "depth": 1}]