Real Estate Development Feasibility Study (Revenue): A $1.2 Billion Developer Tells You How To Do It
There are two sides to a feasibility study and in a previous article I discussed the cost side of the format and:
Now let’s talk about the income side
Without the sales revenue, all you’ve done is spend money, and anyone can do it.
To make it clear what I am going to define for you, let me tell you that there are two forms of Income.
We will talk about Sales Income, in this article, which in our case will consist of large amounts of money that we receive as a promoter in exchange for the real estate units that we have created.
The other form of income in a feasibility study is rental income and will be covered at another time when I write an e-book on business development.
Sales revenue
Due to the composition of our feasibility study sheet, there will be no deductions from our gross sales receipts, because we have included those costs on the cost side of our feasibility study.
Items such as sales commissions for sales agents and various marketing costs have already been considered above.
I have now seen some feasibility study forms, which deduct marketing costs from gross sales revenue to produce net sales revenue.
It accomplishes nothing – “all costs are costs” and should be included in the cost side of the feasibility study, which is what I do and have always done.
When can you get your hands on sales revenue?
Getting sales revenue into your account is very important, yet many people never wonder what the “exact” procedure is in their neck of the woods.
Go to your transportation expert and ask them to provide you with a program of events “with an estimate of the time for each stage”.
This information is important in preparing your cash flow feasibility study form, as it results in lowering your interest cost.
So by knowing this information at the beginning of a development investigation, you are adding a bit of “certainty” to the early stages of your feasibility study.
Let me give you an example:
At the end of the construction phase, the builder moves off the site, there are a myriad of things that have to happen, any one of which can delay settlement and therefore delay getting the sales proceeds.
Some of these things are:
o Architect inspection of the entire project.
o Architect preparing List of Defects.
o Builder calling in subcontractors to correct defects.
o Final inspection by the architect.
o Architect issues Certificate of Completion
o The Surveyor (engineers in some countries) performs the final measurement of the individual residential accommodation units and compares them to the Unit Plan included in the Sales Contract.
o Elaboration of the Final Unit Plan (as used by the transfer office) for its liquidation.
o Presentation of the Unit Plan in the Titles Office.
o Registered Title Issued by the Titles Office.
Can you see that any delay in these items will impact the settlement date and also the calculation of your interest in your feasibility study?
Social Body / Management Plan
It is difficult to keep up with all the different names used around the world for the Legal Entity that manages the complex of units you have developed, however your legal advisor will let you know.
Just as our Towns, Cities and States need Rules and Regulations so that all their citizens live in harmony, so does a small complex of units, condominiums, apartments, etc.
Regardless of what it is called in your part of the world, it is necessary that you hire a legal advisor to prepare one for you, which will include the preparation of a Budget that you, as a developer, will have to pay in a certain amount of money.
The reason I’m giving this brief explanation about Management Plans/corporate corporations is because in the Settlement you’ll get back some of the money you spent to get the Budget going.
You will also have paid the City Council, Public Services, etc. other amounts of money that cover a certain period of time. Once again, you will get some of this money back in the Settlement. These are typically referred to as “Settlement Adjustments” and act as a reduction in the cost side of your feasibility study.
What’s next?
Do you remember that I told you before about the Unit Plan that was presented in the Title Office, well, it has already been issued? Phew, we just received it today, great!
Now your transportation expert has to inform the Buyers’ representative in writing that they are ready to make a deal.
In addition, buyers must inform their individual financial lenders to complete mortgage documents on time and eventually a date must be agreed upon when all these different parties can meet and come to an agreement.
Now, I don’t want you to worry about all this, but I do want you to know, so that you can understand and manage (yourself) and others who have to do all this work for you. Inflating your Top (blood pressure) accomplishes nothing.
But understanding, on your part, goes a long way. Blowing your top, when you haven’t bothered to find out, makes you look silly and unprofessional to the professionals you’ve hired to do the work for you.
So do I get the money now or is there more Colm?
Well, the lender actually gets the money, yes, the lender first pays off your principal and interest debt. And when there is no debt, everything else is yours. That is, his capital is returned to his account and that beautiful profit, which he worked so hard for.