Construction financial management: Assignment 1
Background
ABC Developments: a development finance
A hypothetical speculative development scheme of ten houses
It is intended to illustrate the kinds of problems likely to be faced by a speculative house builder who is operating without sufficient working capital and is reliant on borrowing cash.
The project details:
The land for this development scheme was purchased immediately before the project commenced.
The site was purchased with outline planning permission although detailed permission was not yet applied for.
Detailed planning permission will be obtained after three months from purchasing of the land
Cost of land and construction:
Development Programme:
Finance
Developer Budget
Tasks:
You are employed by ABC Developments and have asked to investigate a small housing project in Falkirk.
Specifically the project out-turn is to be compared with the feasibility study. The feasibility study is included in the Case Study in Teaching Paper Number Two: ABC Developments.
This includes a developers’ budget, projected cash flow and estimated borrowing.
The borrowing includes both that loan by the finance company who are part financing the project and from the overdraft facilities from the developers’ own bank.
The outturn for the project is subject to things going wrong. This includes:
A delay in the granting of planning caused the project to start late. There were also delays in construction starting on site. This lead to an increase in the cost of construction and an increase in the period of the loan for the purchase of the land. It also resulted in houses being completed outside the anticipated selling window.
Because of the delays pushing the development beyond the original one-year period so the terms of the loan had to be renegotiated reducing the proportion loaned to 75%/70% for land and construction facilities respectively.
Interest rates increased from those included in the feasibility study. This affected both the loans to cover the cost of purchasing land and construction costs from the finance company and the cost of overdraft facilities to 1½% per month.
The sales rate of houses was expected to be slower than anticipated and the advertising budget may have to be increased.
Suggestion for report structure:
1. Introduction
What the report is about
You should mention the changes related to you
2 month delay in Planning and Construction
The loan had to be renegotiated reducing the proportion loaned to 75%/70% for land and construction facilities respectively. That mean the Developer will have to finance 30% instated of 25& of the construction fees
The increase rate financial changed from 5% to be 8% per month
Advertizing budget changed from £10,000 to £13,000
Construction price increase to 7%
The sales rate of houses (2 House per month)
2. Updated situation
Present the updated situation (Revised cash flow and Updated developer’s budget – Page No. 8 to 11)
Compute the revised outcome in terms of profit or loss.
3. Factors
Identify the factors responsible for the change in the above giving the contribution of each.
Outline potential changes that could be introduced to the feasibility studies for the company to avoid giving a misleading view and taking on unviable projects.
4. Discussion:
Then discussion about the impact of factors on outcomes variation and try approximately to identify the effects of each factors
5. Summary about the results
6. Recommendations
(2000 words)
Revised cash flow schedule
Reg. No Delays experienced Advertizing budget Construction
Price increase Interest rate Financial
(per month) Rate of house sales
(per month)
Planning Construction
weeks weeks
063 2 5 £13,000 7% 0.8% 2
January February March April May June July August September October November December January February March
Cash flow 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2017 2017 2017 Total
Land facility
Land purchase b/f 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 192,000 144,000 96,000 48,000 0 240,000
Interest 75% 5,760 5,760 5,760 4,608 1,152 23,040
Repayments 48,000 48,000 48,000 48,000 48,000 240,000
Total land c/f 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 192,000 144,000 96,000 48,000 0 0
Construction facility
Plot 1
10,700 19,260 19,260 12,840 62,060
Plot 2 10,700 19,260 19,260 12,840 62,060
Plot 3 17,120 21,400 13,910 9,630 62,060
Plot 4 17,120 21,400 13,910 9,630 62,060
Plot 5 17,120 19,260 17,120 8,560 62,060
Plot 6 17,120 19,260 17,120 8,560 62,060
Plot 7 16,050 19,260 16,050 10,700 62,060
Plot 8 16,050 19,260 16,050 10,700 62,060
Plot 9 20,330 23,540 18,190 62,060
Plot 10 20,330 23,540 18,190 62,060
Roads etc 69,550 58,850 128,400
Total construction 90,950 72,760 115,560 124,120 132,680 96,300 57,780 58,850 749,000
Total advance 70% 63,665 50,932 80,892 86,884 92,876 67,410 40,446 41,195 524,300
Revolving advances b/f
63,665 114,597 195,489 282,373 270,389 232,939 168,525 104,860
Cumulative advance 63,665 114,597 195,489 282,373 375,249 337,799 273,385 209,720 104,860
Interest payment 2,990 7,963 0 10,953
Repayments 104,860 104,860 104,860 104,860 104,860 524,300
Revolving advances c/f 63,665 114,597 195,489 282,373 270,389 232,939 168,525 104,860 0
Developer’s cash flow
b/f 137,500 139,563 147,416 149,627 151,872 187,195 211,831 259,166 312,550 214,402 111,831 -7,189 -132,174 -274,814 312,550
Land
Balance 25% 80,000 80,000
Construction
Balance 30% 27,285 21,828 34,668 37,236 39,804 28,890 17,334 17,655 0 224,700
Finance
Commitment fee 5,000
5,000
Disposal fee
1,000 1,000 1,000 1,000 1,000 5,000
Land finance 5,760 5,760 5,760 4,608 1,152 23,040
Construction finance 2,990 7,963 10,953
Contractor’s own finance 2,062 2,093 2,211 2,244 2,278 2,808 3,177 3,887 4,688 3,216 1,677 30,344
Development expenditure
Architect’s fees 20,000 20,000
Agent’s fees
3,500 3,500 3,500 3,500 3,500 17,500
Advertizing
6,500 6,500 13,000
Legal fees 25,000 25,000
Local authority fees 7,500 7,500
Income
147,140 147,140 147,140 147,140 147,140 735,700
Cumulative deficit c/f 137,500 139,563 147,416 149,627 151,872 187,195 211,831 259,166 312,550 214,402 111,831 -7,189 -132,174 -274,814 -273,662 273,662
Finance institution’s cash flow
Net cash flow -235,000 0 5,760 0 0 -57,905 -50,932 -77,902 -81,124 60,984 94,413 118,022 112,665 153,860 1,152 43,993
Cumulative cash flow -235,000 -235,000 -229,240 -229,240 -229,240 -287,145 -338,077 -415,979 -497,103 -436,119 -341,706 -223,684 -111,019 42,841 43,993
Table No 2: Cash flow schedule for developer and financier
Updated developer’s budget:
Income
Detached Villas 10 units @ £150,000 £1,500,000
Land purchase
Purchase price £320,000 £320,000
Construction costs
Villas 10 units @ £62,060 £620,600
Roads and infrastructure £128,400 £749,000
Development expenditure
Architect’s fees £20,000
Agent’s fees 10 units @ £1,750 £17,500
Advertizing £13,000
Legal fees 10 units @ £2,500 £25,000
Local Authority fees £7,500 £83,000
Finance costs
Commitment fee £5,000
Redemption fee 10 units @ £500 £5,000
Land finance From cash flow £23,040
Construction finance From cash flow £10,953 £43,993 £1,195,993
Gross margin £304,007
Developer’s finance From cash flow £30,344 £30,344
Net margin £273,662
Margin on turnover 18%
Margin on developers outlay 88%
“Construction financial management: Assignment 1 Background ABC Developments: a development finance A hypothetical speculative development scheme often houses It is intended to illustrate the kinds of problems likely to be faced by a speculative house builder who is operating without sufficient working capital and is reliant on borrowing cash. The project details: The land for this development scheme was purchased immediately before the project commenced.The site was purchased with outline planning permission although detailed permission was not yet applied for.Detailed planning permission will be obtained afterthree months from purchasing of the land Cost of land and construction: ( See the attached file) Development Programme:( see the attached file) Finance ( see the attached file) Developer Budget ( see the attached file) Tasks: You are employed by ABC Developments and have asked to investigate a small housing project in Falkirk.Specifically the project out-turn is to be compared with the feasibility study. The feasibility study is included in the Case Study in Teaching Paper NumberTwo: ABC Developments. This includes a developers’ budget, projected cash flow and estimated borrowing.The borrowing includes both that loan by the finance company who are part financing the project and from the overdraft facilities from the developers’ own bank.The outturn for the project is subject to things going wrong. This includes: A delay in the granting of planning caused the project to start late. There were also delays in construction starting on site. This lead to anincrease in the cost of construction and anincrease in the period of the loan for the purchase of the land. It also resulted in houses being completed outside the anticipated selling window.Because of the delays pushing the development beyond the originalone-year period so the terms of the loan had to be renegotiated reducing the proportion loaned to 75%/70% for land and construction facilities respectively. Interest rates increased from those included in the feasibility study. This affected both the loans to cover the cost of purchasing land and construction costs from the finance company and the cost of overdraft facilities to 1½% per month.The sales rate of houses was expected to be slower than anticipated and the advertising budget may have to be increased. Suggestion for report structure: 1. Introduction  *What the report is about  *You should mention the changes related to you  – 2 month delay in Planning and Construction  – The loan had to be renegotiated reducing the proportion -loaned to 75%/70% for land and construction facilities respectively. That mean the Developer will have to finance 30% instated of 25& of the construction fees  – Theincrease rate financial changed from 5% to be 8% per month  – Advertizing budget changed from £10,000 to £13,000  – Constructionpriceincrease to 7%  The sales rate of houses (2 House per month) 2.Updated situation Present the updated situation (Revised cash flow and Updated developer’s budget – Page No. 8 to 11)- see the attached file Compute the revised outcome in terms of profit or loss. 3.Factors Identify the factors responsible for the change in the above giving the contribution of each.Outline potential changes that could be introduced to the feasibility studies for the company to avoid giving a misleading view and taking on unviable projects. 4.Discussion: Then discussion about the impact of factors on outcomes variation and try approximately to identify the effects of each factors 5.Summary about the results 6.Recommendations (2000 words) “
