A real estate development model typically contains two sections — Deal Summary and Cash Flow Model. The former involves calculating the economy and profitability of the project, while the latter portion calculates revenues, net present value, and the internal rate of return.
Philip E. Goforth of Missouri explains that both segments are necessary to ensure professionals construct a well-organized, perfectly planned real estate development model.
The Deal Summary
The Deal Summary begins with listing the project’s schedule assumptions and expected property stats. The following items should be included:
Schedule Assumptions
- Date of transaction
- Sales start date
- Construction start and end date
- Number of months for transaction
- Percentage sold at sale commencement
- Units sold per month
- Percentage closed at construction completion
- Units closed per month post
Property Stats in Square Feet
- Gross and net site area
- Deductions
- Density (FSR)
- Number of units
- FSR gross buildable area (GBA)
- Construction GBA
- Average unit size
- Net salable
Development Costs
Once the statistics are listed, professionals move on to detailing the assumptions for development costs regarding the total amount, price per square foot, and cost per unit.
Depending on the project type, development costs will include building costs, land costs, hard and soft contingencies, marketing, servicing, and more.
Utilizing the property stats listed in the first stage, developers can complete the following table with relative ease:
| Development Costs | |||
| Total $ | $/Unit | $/SqF | |
| Building Costs | |||
| Servicing | |||
| Hard contingency | |||
| Soft contingency | |||
| DCCs | |||
| Consulting ; warranty | |||
| Finance/Bank costs | |||
| Marketing | |||
| Overhead | |||
| Finance – Interest | |||
| 50% commissions | |||
| TOTAL |
Sales Assumptions
The third Deal Summary step requires determining the project’s revenue. To do this, developers conduct market research and base their per-square-foot sale price on their findings.
Using that figure as the revenue driver to calculate total, per-unit, and per-square-foot sales, they deduct sales commissions and warranty to arrive at the project’s net proceeds.
Financing Assumptions
Here, project owners should aspire to assume the loan-to-cost percentage, land loan, and interest rate.
Before determining the loan amount, the total development cost is required. Since the interest expense isn’t completed until the Cash Flow Model stage, professionals come back to these calculations following the second real estate development model portion.
The Cash Flow Model
After the Deal Summary, the final part commences — Cash Flow Model. It involves five sections, as per the following:
- Revenue build-up — Professionals endeavor to conclude the townhome closings and absorption. The latter is the available homes sold during a certain duration. The former is the number of homes closed after complete construction.
- Expenses — Development expenses include pre-construction spending, land cost, and construction spending. The numbers are already included in the Deal Summary Development Costs Assumptions section.
- Costs to fund and repay capital — The former is the project cash flow’s shortfall which requires financing (if applicable). If the total net revenue is larger than the development costs, positive proceeds repay borrowed capital.
- Financing — Loan balances, repayments, accrued interest, and draws are all calculated here. None of the ending balances should be more than the maximum loan amount.
- Free cash flow and IRR — Finally, the project’s levered free cash flows and IRR are calculated
