Hey everyone, happy Friday. I'll be headed out on some family stuff over the weekend, but on Monday I've got a brand new template I'm building from scratch. It is going to be for the development of condos. Here I'll talk about some general things I'm considering prior to jumping into the sheet.
This financial model has been completed, check it out here.
The general user will be anybody doing a real estate development project where all the units are sold off at some point and not held for cash flow. This is not going to buy build and hold, it is for build and sell.
The model's main purpose will likely be to figure out what the economics of a given development project look like (expected investment required, construction loan estimation, returns (IRR / NPV). This model won't be for running a development company and trying to create a financial forecast of all developments expected to happen over a 5/10/20 year period. Instead, it is just for single project analysis.
The timeline that makes the most sense to me would be 60 months. Most development projects are less than that and few are more. I think I'll do ten condo types and each type will be able to define what their various cost components are and when development starts for unit tranches of each type as well as when the units are sold for each type. What I just said sounds simple, but it will take some though on how to make that dynamic and easy to use.
To me, it probably makes sense to have two rows for each condo type. One will be for the count of new units being developed per month and the other is the units sold per month. Each time units start being developed, the total unit cost will hit in that month. There will be a separate area to define the estimated sale price per unit for each of the ten condo cohorts as well as a separate area to detail the average cost of each unit type.
I'll also have to have a section for development costs that are not directly tied to each unit, such as leveling the area / doing land work prior to being able to start on anything else. These costs will be in a separate area that can be defined over time.
As the costs populate from all the assumptions above, it will drive the investment / debt requirements (draw on the loan).
As far debt options, I think what is most common is a construction loan with dynamic draws that happen over time based on the expected costs, how much is funded through debt vs equity, and interest rates. As far as making the debt payback dynamic, this could get tricky if you have a real estate development project that is happening in phases. This means you are building things and selling things potentially at the same time.
The best way I've found to model this dynamic is to use any positive monthly cash flows from sales proceeds to pay down any debt first as well as using any positive monthly cash flow periods to fund future development. The main question that must be asked is do you make distributions with the positive cash flow periods or do you make the model 'save' this and use it for any future investment requirements rather than getting more debt / equity.
The model needs to make sense for the general use case, so to me it is most elegant to keep it simple. I'll probably structure it so any negative month is subject to debt / equity based on the percentage defined in the assumptions. Any positive month is going out as distributions. Technically that might not actually be happening, but it makes the more accurate analysis of what is happening based on cash in / out over the life of the project.
The other way to do it would be to just use debt/equity assumptions for the build/construction costs only and ignore any positive cash flows from selling units off. This means you may actually be getting more debt that you really want to show if you do plan to use proceeds to pay for future phases of the project development. If you sell 50% of the units in month 15 for $4M and then do another $2M in development after that (for the same project) then do you draw more of the loan down or do you use the proceeds to fund the development or use the proceeds to pay down the existing loan and fund development?
The other component of this model will be options for joint ventures. I think I'll integrate the IRR hurdle waterfall as well as the preferred return waterfall. The user can see how the returns look for each deal type and can configure them separately. For that, I'll just plug in the final project cash in/out per period into the top of the pre-build templates I have for that and let the logic work from there. This part is not too complicated since I already have all the hard logic built. It is easy to integrate those templates.
Additionally, if this is a joint venture, I'm going to add in options for GP management fees and disposition fees.
These are all questions and key decisions to think about when I go to build this financial model template.
Some templates that may also be useful for a developer:
- Project Management Tracker
- Expense Tracker (budget vs actual)
