Real Estate Development: Development Finance and Funding - Essay Example

Development Finance and Funding (Real E Development) PART This proposal concerns the development of The Dylon Site located along Worsley Bridge Road in London with address SE26 5HD. This parcel of land is around 2.5 acres in size and it is supposed to be purchased and developed in a manner that shall give the company profits in the long run. In acquiring the land, appropriate steps shall be followed to make sure that the developments which shall be erected on the land will be a valuable asset to anybody who shall acquire it later. In the area where the land is located the highest number of floors a building is allowed to have in this region is seven. This number of floors can however be reduced or increased depending on the size and type of foundation which is an intended building shall have. The wider a foundation is, the more the number of floors which can be accommodated. All buildings in the area must be fitted with all social amenities and rates for facilitating those services must be remitted appropriately when needed. Before any building is constructed in this area it is recommended that an environmental impact assessment report be submitted to ensure that any expected or perceived environmental concerns are addressed on time. It is therefore important for all contacts of relevant authorities be established and consulted before any transaction in regard to the land and intended purpose can be approved. This report must accompany any other application which shall be made regarding the land. This 2.5 acre piece of land is located in a prime region where so much residential housing development is extensive and complex. As such its cost is relatively very high compared to other regions within the town. It might be very difficult to purchase the land using the present resources of the company. The terms of sale of the land will be effectively evaluated and measures taken to ensure all the money are available. There are several options the company has including buying the land, develop it or sell it as shall appear appropriate depending on the capacity of the company to manage increased responsibilities which shall come as a result of expanding the company. The rate at which land appreciates is the main motivation behind the decision to buy this land. This is an investment which shall never be regretted. The decision as to what the land shall be put into will depend on several reasons as shall be agreed during deliberations from the relevant committees of the company. As at now the focus is on purchasing the land with the assurance that even without any development placed on the land, its value will be higher in a few years’ time compared to its current price (Commission on Local Governance, 2000). This is not the first land trade the company is dealing with. There are so many pieces of lands the company has bought and sold off successfully bringing about lots of revenue to the company in the past. This current 2.5 acre parcel of land is very small compared to the 35 acres parcel of land which was bought and sold in the years 1999 and 2004 respectively. The company has staff well experienced in dealing with such transactions. We shall rely on our experts both in business and legal departments so that every step we shall take shall prove to be profitable for the company. GENERAL PROJECT INFORMATION DEVELOPMENT APPLICATION 3 weeks APPLICANTS NAME Company Agents APPLICANTS ADDRESS London REFERENCE: / DA/CC number 0023/908/002 DATE: 20/03/2010 DEVELOPMENT NAME School Facility DEVELOPMENT ADDRESS The Dylon, Worsley Bridge Road, London, SE26 5HD DESCRIPTION OF WORKS Demolition and development of school premises Gross floor area (commercial) m² 200 Floor Gross area (Home) m² 200 Floor Gross area (Business) m² 200 Floor Gross area (For industrial purposes) m² 250 TOTAL SITE AREA 2.5 acres Floor Gross area (For other purposes) m² 0 Floor Gross area (for parking purposes) m² 100 Parking spaces number 50 WORKS OF DEMOLITION m² 264     Profitable Deal The land the company intends to buy is in a prime region where land is scarce and very expensive. As such its value increases faster than in other areas and it is possible to make a lot of profit after selling the land without doing any extra developments on it. However, there are several options which shall be considered after the land will have been successful possessed to determine which most profitable and feasible developments which can be put on the land (Sharman, 2003). Whether it be developed or sold off as it is, proper calculations shall be made to ensure that the asset gives the company more profit than would have been obtained had the money been deposited in a financial institution like a bank. One thing which shall be very important to look at is the cost of the development versus the revenue which shall likely be obtained through various transactions which shall be done on the land. The land already has some minor developments done on it which shall be included in the land’s total cost. Demolishing this for new developments might be a good option as more revenue will be obtained from more development which shall use the land fully. Some cost shall be involved in the demolition of the buildings which already exist on the parcel around. If it shall be done carefully, it is possible to reduce the cost of the purchasing materials for new construction. The buildings on the site are not very old and they were constructed using stones of good quality. To save them it shall be necessary to engage professional people who shall help in the demolition exercise to ensure that as much material is saved for future construction. The cost of the land is approximately £739,500 while the approximated cost of development is £3,256,700.00 together with its development. The revenue that the entire property can generate is approximately £80,000 per month. This converts into £960,000 annually. The deal is lucrative, but requires the property to earn the revenue continuously for 4 years, after which it will have earned £3,840,000.00. By this time, the profit will have been £583,300.00. Expert advice shall be sought to ensure that no material is put to waste unless it is considered necessary. Even iron sheets and other roofing materials which shall be recovered from the demolition exercise will be used in creating external boundaries and preliminary works and even later sold to people who might require them for other household uses. The company has a reliable public relations team which shall ensure that anything that can be given to the community around where we operate is given as necessary. In order to increases chances of making profits from the land it shall be necessary for the company to do a needs assessment in order to obtain various options which shall be considered as possible development options for the land. This is a residential estate where premises of high quality have been developed and it might possibly be lacking special amenities like schools, health facilities and rental residential premises for small families or individuals. It shall therefore be necessary to carry out a baseline assessment of the region and decide on the best option. From previous consultations with government authorities in the area there is an indication that they will prefer a learning institution to be established in the area since it is a quiet place that is very conducive for learning purposes. Running a school in this environment shall require the availability of learners and instructors. While it might be difficult to obtain learners, instructors can be easily obtained locally or outsourced. Although there are schools already existing in the regions around the intended location school, they are far apart from each other. We shall take advantage of this situation in order to get students who prefer schools near where they stay and can operate easily and quickly on daily basic. Another option that shall also be available shall be to provide means of travel to schools from areas which are far away from where the proposed school. Another major consideration which shall also be made to ensure the school has a population which shall sustains its activities and services shall be to consider the cost of learning is slightly lower compared to schools in the vicinity. While this may attract parents whose incomes are middle or lower, it may pose a great challenge on the resources which shall be needed to pay instructors especially in the first few years the school will be running (League of California Cities, 1994). It shall be important that teachers are obtained who can be willing to grow with the school and be committed to give their best to the learning of students at a relatively low pay. It might be hard to get such people who can sacrifice financial opportunities available for them in other institutions. In case it shall become difficult to obtain such instructors it shall be necessary for the company to dig deep into other resources to ensure that the services needed in the school are duly paid for including a good salary for the teaching and non teaching staff.This shall be necessary to ensure that instructors of high quality and who are motivated highly are available for the training of children committed to the care of the school management and administration. Another very important aspect which shall be necessary is the non teaching staff. The management of the school shall be committed in educators whose track record is full of performance especially in growing schools and capable to relate well with other fellow employees. After the school is well established the company shall decide whether to dispose or not. However, it shall be advised the management to consider maintaining it as one of their assets and use it to back as much of what was invested as possible before disposing it off. Disposing it when it shall have been established well in terms of quality of education and new admission and payment of school of fees will make it easier for the company to bid highly on the cost. It shall be good if the school can be sold off to parents’ organization of the school of organizations which have the ability to manage learning institutions and ensure the company investment and the desire of the government in having a learning institution shall not go in vein. The company shall decide to keep the school and have a specialized unit to oversee its general growth and development (Clinton et al., 2011). This shall ensure that the company enjoys the profits which shall come when the school will be up to its full capacity in terms of teachers and students. It also means the company will be ready to take up the risks of losses which might result from low admission or poor performance. However, to maximise its profits, the school can be insured against any possible disasters to ensure that in case they arise they shall be taken care of appropriately. Long-term investment in education sector should be considered. It is the mandate of the research and development section of the companyto considers the profitability of investing in education sector and advice the shareholders appropriately. For many years the need for education has continued to increase (Kilger, 2002). The number of people who seek education is rising every year due to high population growth which is experienced in some countries with little being spared. In addition to this demand, education has also become very complex and continuous. The evolution of information technology has made this need more extensive. The demand for more learned people in both the private and public sectors is contributing greatly to this high demand of quality and practically evidence based education (Nik, 2010). The ability to provide quality education that is wholesome is the great need of today’s generation. While having education is not a guarantee for employment in today’s world where unemployment is the problem of every government including developed nations, it can increase your chances of securing the few opportunities for employment available. The higher the education one has, the more the chances of getting a well paying job in today’s job market. This is one thing that is motivating many learners to acquire more and more education. The majority of the people who do not get the well paying jobs need to earn something in order to continue living (Governors Office of Planning and Research, 2012). Education plays a very significant role in ensuring that this large population has decent lives. As such it is important that education which related to providing solutions to everyday concerns of people will be greatly helpful in providing these people with something to do. What is going to make this proposed school different and attractive to many people is the ability to integrate the practical aspects of life into learning. It shall be important to contact relevant authorities to advice on the modalities of this integration. This system of learning will add much value to the overall cost of the school at the time the company shall be satisfied to dispose it off. PART 2: Risk Analysis Risk analysis for this proposal is based on the present market in the UK, the cash flow and liquidity of the real Estate agency. This refers to the comparison between the liquidity of this company and the cost of development (Clinton & Van, 2006). The percentage of the resources that will be committed to the development of the company should be able to leave sufficient funds to maintain a stable cash flow. Committing all our liquidity into fixed asset development will thus be considered a high risk practice, and can lead to a complete deficit before the realization of returns on the leasing and renting of the property commences. Market Comparables The first parameter we observe is an analysis of the real estate property market in London, specifically focusing on the property size, their values and their return on investment. The data are presented below: Site Location Size (Acres) Value (Pounds) Monthly Rent (Pounds) Chiswick High Road 1 11650000 85000 Claremont Court, W1H 0.5 1670000 70000 Abell House, London SW1P 1.5 11835000 90000 Oakland’s House 1.5 11655000 85000 Law Society House St. Victoria Belfast 0.45 1670000 75000 The decision of the proposal to place the monthly rent of this property at 80000 GB Pounds is within the limits that can withstand the risks of market competition. Graph Comparing the sizes of the development Projects in the London’s Market The second aspect is the expenditure that results from cost of developing the property. It has a cost implication on the cash flow of the company. However, considering the proportional spread of the cost of developing this property and the value of other properties in the market, the cost of this property is 23401444.44 pounds on a 2.5 Acre land, which is reasonable and has low exposure. But because of the instability in cash flow, there is need to reduce the risk of over commitment into the development. Comparing Values of the development projects Graph Comparing Values of development projects in the Market COST ESTIMATES (Model table - to be adapted by the consent authority)   Genuine fair estimate 6960000 Works of Demolition £ 4350000 Site real preparation £ 435000 Dredging £ 17400 Preliminaries £ 8700 Building costs 870000 steelwork/metal works 1740000 carpentry/joinery 852600 windows and doors 2327250 Roofing 2610000   Internal relevant services £ 475020 Internal fittings £ 453,987 Other relevant structures such as pools 394968.7   External relevant services such as electricity £ 298320.90 Professional fees (e.g. architects and consultant fees, excluding fees associated with non construction components 435852.60   Other (specify) £ 435852.6 Parking / garaging area £ 300933 GST £ 394579.8 TOTAL £ 23401444.44 We ought to reduce the cost of development by half. It means we will reduce the area of land to be developed. Sensitivity analysis shows that the shows that the gap between the annual earnings and the cost of development is currently 23401444.44-960000=22441444.44. This is an annual deficit which will only end after 4 years. We thus have to reduce the figures for the elements of costs by half. We will thus have the figures appearing as shown in the table below. COST ESTIMATES (Model table - to be adapted by the consent authority)   Genuine fair estimate 3480000 Works of Demolition £ 2175000 Site real preparation £ 108750 Dredging £ 8700 Preliminaries £ 4350 Building costs 4850000 steelwork/metal works 870000 carpentry/joinery 426300 windows and doors 1163625 Roofing 1305000   Internal relevant services £ 237510 Internal fittings £ 226993.50 Other relevant structures such as pools 394968.7   External relevant services such as electricity £ 149160.45 Professional fees (e.g. architects and consultant fees, excluding fees associated with non construction components 217926.30   Other (specify) £ 217926.3 Parking / garaging area £ 150466.5 GST £ 197289.9 TOTAL £ 11700722.22 The cost has changed to 11,700,722 Pounds. The rent then reduces to 40,000 Pounds per month, and the profit earned from the ground rent after the four years becomes half of the £583,300.00 previously earned. New appraisal Amendment of the proposal for the intended acquisition and development of land is critical because it gives a chance to reflect on the intended activity and advise appropriately. It is the only way for one to see expert advice before putting ideas on paper and ensuring that whatever investment put on land is profitable and will be for the benefit of the community in that place. In many cases there are always competing or conflicting purposes which a particular community would need to be put on a particular piece of land. Through proposals submitted for the same land, it is possible to determine the best use which can satisfy the interests of all parties involved. In the 21st century, after the effects of industrialization the world has experienced especially the damaging and threatening effects of climate change, environmental friendly developments are highly desired and every project must submit a detailed report on how environmental standards will not be compromised throughout that development. There are experts who have been trained on assessing environmental compliance and these must be certified before their reports can be accepted as valid and authoritative for any development activity. It is important to consult government authorities on the individuals they have who can be contracted to carry out such environmental impact assessment because of their expertise and honesty in working on such a development activity (William, 2012). In undertaking this development activity, the company shall conduct an environmental impact assessment using internal experts and verify their findings with results from an external environmental agent. A final report shall then be prepared based on the two reports and submitted for approval with both copies of reports submitted along for any confirmation as required by law within. There are different planning users which exist and sometimes it can be very confusing in the choice of whose desires or interests to be accommodated. It becomes easier however when designing property for public use since there is a given level of all user plans which must be met and it’s easy to achieve this target in most cases. The social planning user and policies provide guidelines to ensure that land developers take into consideration the social needs of people like recreation, water, electricity, health care and uncontaminated air (William, 2012). It is usually easy for developers to consider economic policies due to the profits associated with good economic plans. In most cases it is easy to overlook the importance of social components in development. It should always be remembered that buildings are meant for people and the needs of these people should always be given priority in whichever use land is being allotted (Van, 2011). A proposal is therefore said to be complete when it contains reports or results of environmental, social and economic audits to make sure users’ interests are taken into consideration and their needs satisfied. There are areas which are not suitable for certain development activities no matter how good they may appear to the eyes of the owner or buyers. It is not appropriate to construct houses for people near a swamp because of the likelihood to find mosquitoes which will transmit malaria causing parasites. In such a place, it will be too expensive living there since different methods would have to be used to bar these insects from accessing the premises of people. This in the long run might be too expensive compared to other possible options. It important to consult qualified land developers on the best use for a particular piece of land you intend to purchase for a certain purpose. There are relevant authorities who have done mapping for any country and they know the prevailing conditions in every part of that country. These should be effectively consulted so that both the interests of land owners and sellers are taken into consideration in any deal that concerns land (William, 2012). The desirable activity suitable for the 2.5 acre piece of land will be a learning institution, most preferably a complex that can incorporate learners of different capacities and at different levels. The design shall therefore incorporate all facilities which must be available in an actually school environment to make sure that in the future the facilities can be used for any learning activity of choice depending on the need (Nokes, 2000). The space is not very much sufficient for learning of children who need much physical activity. It would therefore be not used as a learning facility for children under grade five. As a learning facility its use shall continue from time to time be assessed and necessary modifications are put in place. Nevertheless, with wide consultations the building shall be provided with all necessary equipment to ensure it can satisfy any academic use it shall be required to serve the public or clients who shall need to purchase it and run it on their own. In a recent development committee meeting the proposal to construct a school in the said parcel of land was considered and a team was constituted to explore possibilities of a school fitting in the area. Another mandate of the subcommittee will be to assess which category of learners can be comfortable in such an area and possible additional facilities which shall be needed for learning to be successful. They are expected to present their report in the sitting of the development committee. The committee also advised the finance department to present a financial statement to them and advise them on the best approaches which can be utilized to get enough financial resources to purchase the parcel of land. The finance department is also expected to give a projection of the possible value of land after every one year from the time this land is expected to be purchased and advice on the best time to dispose the land (Professional Accountants in Business Committee, 2009). Furthermore they shall be able to advice on the cost of development of the land and the most profitable items which shall be located on the land. They are expected to liaise with the building and structural department to be able to get accurate costs of the development of the proposed school premises. The committee will finally make a decision on a better way as far as development of the parcel of the land is concerned (William, 2012). Sensitivity Analysis The land will cost about £739500. We shall engage sales agents in acquiring the land. At the moment the land is not yet in the market but we have enough information that there is an intention to sell it from the owners. It shall be the mandate of the public relations and legal department to follow on the appropriate policies which should actually be looked into so as to ensure the land is available in the market and ready for potential buyers to bid. One of the procedures which must be done will be to ensure that the land number is well searched to ensure that it is available for sell. It must be cleared of any fraud or court cases attached to it. The owner of the land must also be certified and an affidavit be sworn in addition to a valid title deed be processed for the land if it is not yet available. The intention for sale must also be expressed in public directly or through a sales agent. The company will organize and give the owner of the land an opportunity to settle on preferred lands agent to handle the transaction. If the client settles on an agent it might not be necessary for an advocate to be sought since many sales agents have their own legal officers who witness all their transactions. The legal component is very important in matters dealing with land due to the sensitive and complex nature of land trade. The landlord must also settle on the mode of payment and the total cost of the land. Although we shall plead the terms of payment to be made flexible enough to enable us to pay for the land without seeking extra financial support, we are aware that the bid might be too high for us. We are however determined to secure the piece of land and we are willing to bid higher than the highest bidder. The finance department which shall directly be involved in the purchase of this parcel shall advice on the highest possible bid the company can manage based on the possible value of this land per year as they would have determined (William, 2012). Development cash Flow We therefore present the pattern of cash flow of this project, where we present the average profits of the five property projects in the market used in the comparables for three years from 2010 to the first quarter of 2013. Year Profit (Pounds) 2010 Q1 280791 2010 Q2 290249 2010 Q3 293582 2010 Q4 282948 2011 Q1 286658 2011 Q2 298729 2011 Q3 295024 2011 Q4 298216 2012 Q1 293375 2012 Q2 302399 2012 Q3 301168 2012 Q4 300361 2013 Q1 306919 Cash flow in the profitable developments The ultimate average of the profits for the 3 years is 115856.85 GB Pounds. The reality is much more than the 40,000 Pounds that we had projected in the appraisal. We therefore have room for improvement of the appraisal using the examples of the comparables that we have used in this project. Non Profitable market We do the same comparisons for developments that are no longer profitable. Here we sample other sample other 5 development projects where the projects are not profitable and do not have stable cash flows. Year Profits (Pounds) 2010 Q1 115545 2010 Q2 119057 2010 Q3 117234 2010 Q4 116836 2011 Q1 113863 2011 Q2 117691 2011 Q3 116610 2011 Q4 115716 2012 Q1 114828 2012 Q2 114882 2012 Q3 116624 2012 Q4 114264 2013 Q1 112989 Average 115856.85 Graph showing Non Profitable projects. Amendment of Ground Rent We maintain the project as a commercial property since it is in a commercially developed location in London. To that effect we classify the rent as a commercial rent, where we can lease part of the ground to outsider clients. Additionally, we settle of developing this property as a commercial product owing to our focus on maximizing the future profits and lower the operational costs. Working with the ground rent of 40,000 Pounds per month, we are bound to earn annual revenue of 480,000 Pounds (40000*12). For us to regain our projected profit in the appraisal that is £583,300.00, we ought to adjust our annual revenue upwards by obtaining the difference between the two, and dividing by 12. We then will have received the adjustment amount that we ought to add to the monthly ground rent of 40,000 Pounds. Calculation and Residual Appraisal Projected rent = £ 583,300.00 Present Ground Rent = £ 480000 Adjustment = £ 583,300.00 - £ 480,000 = £ 103,300 Adjustment on Monthly Ground Rent = £103300/12 = £ 8608.33 The new ground rent on the property = £ 48608.66. Our residual appraisal is expected to adopt the procedures that will focus on applying the new ground rent. It will lower the costs of developing the property by half before the development begins. With the new ground leasing, we expect to have the initial monthly profit of £ 103300, which we project to be increasing every quarter of the years, by at least £ 10000 per quarter. Our projected cash flow for the next three years appears as follows: Years Profits (Pounds) 2013 Q1 103300 2013 Q2 114245 2013 Q3 126178 2013 Q4 143430 2014 Q1 165000 2014 Q2 190678 2014 Q3 250457 2014 Q4 298216 2015 Q1 294000 2015 Q2 303403 2015 Q3 310467 2015 Q4 310000 Graph showing the projected cash Flow for the next three years. Comparing costs and revenue The site purchase cost does not affect the operational cost because it is a one-off non recurrent cost. In essence, its adds the value of the property which we consider in the business as a fixed asset (Accounting Education Change Commission, 1993). Fixed assets do not form part of the profit of loss in this project. Most of the costs of this development are non recurrent. We then expect that at the end of development, the property will earn either fixed or incremental revenue, and will incur minor recurrent costs such as the cost of maintenance of the property. Conclusion As we had expected from the beginning of the appraisal, there is usually an inherent appraisal projection in a real estate development project that essentially differs from the real values in the market based on the real profits and cash flows. Interpretations of the comparables are essential in determining the risks involved in the process of decision making. Out of the market search, the most vital comparables are with regards to cash flows, which have to be measured for a period time before the commencement of the real estate development project. References Accounting Education Change Commission, 1993. Issues Statement Number 4: Improving the Early Employment Experience of Accountants. Sarasota, FL: American Accounting Association. Clinton, B. D., & Van, A., 2006. Management Accounting - Approaches, Techniques, and Management Processes. New York: Thomas Reuters RIA Group. Clinton, B.D., Matuszewski, L., & Tidrick, D., 2011. Escaping Professional Dominance? New York: Thomas Reuters RIA Group. Commission on Local Governance, 2000. Growth within Bounds: Report of the Commission on Local Governance for the 21st Century, 2000: Recommendations on future local governance options, including LAFCO reform. Available from www.clg21.ca.gov. Governors Office of Planning and Research, 2012. The Guidelines discuss local planning activities and how to write or revise a general plan. California: Wiley. Kilger, W., 2002. Flexible Plankostenrechnung und Deckungsbeitragsrechnung. Wiesbaden: Gabler GmbH. League of California Cities, 1994. A Users Guide to The Ralph M. Brown Act: An easy to read explanation of the states open meeting laws and the responsibilities of local government with regard to public meetings. California: Sage. Nik, N., 2010. The Viability of Re-Developing Kampung Baru within the Ambit of Current Planning Structure and Market Condition from Financial and Social Perspectives. London: Sage. Nokes, S., 2000. Taking Control of IT Costs. London: Prentice Hall. Professional Accountants in Business Committee, 2009. Evaluating and Improving Costing in Organizations (International Good Practice Guidance). London: International Federation of Accountants Sharman, P. A., 2003. Bring On German Cost Accounting. Strategic Finance, 2–9. Van, A., 2011. Presentation at IMAs annual conference - Managerial Costing Conceptual Framework Session. Orlando, FL: Unpublished. William, J. F., 2012. A lively, well-written discussion of nearly every aspect of planning in the State. California: Solano Press. Read More