Quiz 17: Financing Land Development Projects

Business

Land development Activity Refer to concept box 17.1 which shows the preliminary feasibility analysis of land development. The developer acquire 20 acre (871,200 feet) of land and pan to develop residential apartment on the land. There are three type of apartment the developer is planned on the land and price and number of all type of apartment is different. According to developer plan there is 32 lot of Standard interior apartment whose cost is now $103,000, 32 lot of premium interior apartment whose cost is now $118,000, and 16 corner lot whose price is $125,000. a. Financial feasibility of land development is calculated below: img The result will be as follows: img Thus, return on total cost is now img which is lesser than return on total cost calculated in the book. This is because cost is increases and price of apartments is decreases. b. Total net profit = $1,258,000 Total cost = $7,814,000 Price of land = $1,000,000 Total cost of project without considering land price = $6,814,000 If the developer wants 21% of return on the cost the value of cost is calculated below: Suppose value of land is X. img Therefore, the ask price should not be more than $683,520 Thus, If the developer wants 21 percent return on the cost then the value of land will be img

Land development Activities Land development activities are the first step in developing and creating the real estate property. Land development activities have the price focus to the end user of the real estate, like residential apartment holder, office, and commercial building. So Land development activities is performing mainly based on the end consumer need and wants. Land development activities are start which acquires the land for the future development. Project development activities is based on purchase of specific land and create office or residential apartment but Land development activities is mainly consider development and land and source of financing to acquire the land. Project development activities are first step before land development activities. Project development is mainly a creating a plant o develop particular residential or official land for future use. Land development activities are ground level activity is formulated based on project development activities.

Financial Land Development Project TSG Corporation is planning to develop a new project of land development. Total land cost in project is $1.5 million and direct development cost is $2.7 million. CF bank agrees to finance 40% of the value of land and 100 percent of value of direct development cost. Total interest rate is 11%. Basic Information of the project is shown below in Form of Excel screen shot: img Total cost in term of Land Development and direct development cost is shown below in Form of Excel screen shot: img TSG wants to develop 147 apartments out of which 87 are Standard apartment and 60 deluxe apartments. Cost and number of both type of apartment is shown below in Form of Excel screen shot: img a. Release price is that amount of the sales that is goes to the lender. Release price is the amount that borrower pays to the lender. Here borrower agrees to pay 83.33% of sales to the lender until full amount is repaid. Release price is calculated by following formula: img Price of standard apartment is $36,000. SO, release price for Standard apartment is calculated below: img Similarly, Price of standard apartment is $38,000. SO, release price for Standard apartment is calculated below: img Thus, Release price for Standard apartment is img and release price for deluxe apartment is img . b. Total land cost in project is $1.5 million and direct development cost is $2.7 million. CF bank agrees to finance 40% of the value of land and 100 percent of value of direct development cost. Total interest rate is 11%. Total loan financed is calculated below in following table: img Thus, Total loan amount including interest carry cost is img . Calculation of interest carry is shown in part (C) of this solution. c. in the beginning TAG drawn 40% of land value from the bank which is $600,000. After that in first three month TAG has drawn $600,000 per month for next three month and $300,000 for next three month. Loan drawn pattern is shown below in excel screen shot format. img TAG has to pay interest based on total outstanding loan company has that in the beginning of first month there is only $600,000 loan then TAG has to pay interest on $600,000 only. In the next month TAG has to pay interest on the summation of two month loan plus interest carry. Same thing happen for all six months until TAG drawn fully from the bank. Interest of first month is calculated in the excel sheet and screen shot is provided below: img So, total interest in first month is $5,500. Now in beginning of zero month total value of loan is last month loan amount and interest carry. So total value of loan in beginning of first month is calculated in excel and screen shot is provided below: img First month TAG drawn another $600,000 from the bank, then total till first month loan drawn is calculated in excel and screen shot is provided below: img Total value of loan at end of first month is $1,205,500 Similarly loan is drawn for all six month and loan drawn interest carry is added. From the month 4 bank started sales and according to agreement bank stated repaying the interest and principle to the bank. Loan repayment and interest carry is calculated in excel and screen shot is provided below: img From the excel calculation it is found that total value of interest that TAG pays to bank is $291,527. d. Total project cost is calculated in excel and screen shot is provided below: First of all calculate direct cost. Screen shot of calculation of direct cost is show below: img Thus Total Direct cost is $4,649,273. Now Calculation of indirect cost which included operating expense, administrative cost is calculated in the excel and screen shot is provided below: img Total indirect cost of project is $297,100. So, total cost of project will be summation of direct cost and indirect cost. Total cost of project is calculated in excel and screen shot is provided below: img Total cost of project is $4,946,373. Thus, total cost of project is img Total value of loan is $3,591,527 and total project cost is $4,946,373. So percentage of total project cost financed through bank is calculated in excel and screen shot is provided below: img Total percentage of total project cost financed through bank is 72.61%. Thus, Total percentage of total project cost financed through bank is img . e. Life of project is 2 year that is total 8 Quarter. TAG corporation drawn loan for first two quarter and sale the project from second quarter to 8th quarter. From the interest carry calculation it is fund that TAG has able to repay all the cash principle and interest carry in 20 months. TAG Corporation has cash inflow in term of Sales, loan drawn and interest carry. Total cash inflow for TAG corporation is calculated in the excel sheet and screen shot is provided below: img Total cash flow for TAG are in term of interest and principle payment, down payment for land, and other operating expenses. Cash outflow for TAG is calculated in the excel sheet and screen shot is provided below: img Net cash flow for TAG is the total cash inflow minus total cash out flow. Net cash flow for TAG is calculated in excels and screen shot is provided below: img NPV of the project at rate of 15% is calculated in the excel and screen shot is provided below: img NOV of the project at rate of 15% discount rate is -$151,305. IRR of the project is calculated in excel and screen shot is provided below: img IRR of the project is 6.10%. Thus, NPV of project at discount rate of 15% is img and IRR of the project is img

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