Building a feasibility is an important early-stage task when planning any development project. A feasibility study can be complex, or ‘back of the envelope’. Either way, the process is designed to show both the developer and any potential financier and stakeholders that the project is commercially viable.
An initial feasibility study should be undertaken before acquiring a site to ensure that the purchase price of the land allows for a satisfactory profit margin for risk. The exception might be if you have owned the property for a period of time and want to explore its development potential down the track.
The below is not exhaustive, however, is designed to be an initial guide to building a feasibility and outlines some common costs that should be included. Every project is different, and costs will vary on a case-to-case basis e.g. a steep site will have higher costs relating to retaining and engineering than a perfectly flat site.
Let’s start from the top.
Revenue
What can you develop on your site? A bulk and location will identify the highest and best use of the site. Once this has been confirmed you can estimate the market value of each individual unit or lot (I’m assuming these values are GST-inclusive for the purpose of this exercise). There are 4 primary types of lenders that operate in the property finance market. These consist of Banks, Non-Banks (otherwise known as finance companies), Private Lenders and Mezzanine Financiers.
Most financiers will require a registered valuation (“RV”) that they will rely upon to support values. Some non-banks will finance projects without a valuation and rely on their own estimates. If your estimate is higher than that of the RV (or the lender’s estimate), then the lender will rely on the RV (the exception might be if there are qualifying presales above the RV/lender estimate).
You also need to consider GST, GST Facility and Sales Commissions.
Project Costs
The most obvious one should be the cost of land.
Initially, the land value should be input into the feasibility at the purchase price. This way, the true margin can be calculated.
If the land valuation shows an increase in value relative to the purchase price, then the uplifted land value can be put into the feasibility and count towards equity. An uplift in a site value can be the result of a range of factors including prudent market timing, purchasing off-market or the granting of resource consent and building consent.
In addition to land, we also need to think about Demolition & Site Clearance Budget, (Civil) Construction Budget, Professional and Local Authority Fees and many more.
Finance Cost
Development Finance costs are typically broken down into three segments.
Interest costs – Usually capitalized to the facility monthly in arrears and charged on the balance of the loan i.e. what you have actually drawn down from the lender.
The Lateral Partners model will calculate an estimate of these for you, assuming an average 70% utilization rate.
Line Fee – a fee charged on the facility limit and capitalised monthly in arrears. This figure will be constant each month and typically works out to be c. 1.00 – 3.00% per annum depending on the lender.
Establishment Fee – The upfront cost charged by the lender expressed as a percentage of the loan. This might sit somewhere between 1.50% – 3.00%+.
Lenders can be ambiguous with the way they communicate interest and fees in their offerings. Always ensure that you do the percentage calculations yourself to check what amounts they are using to calculate dollar figures, or better yet, get Lateral Partners to do it for you.
The Lateral Partners’ Model
We have developed a model we typically use when doing initial analysis on a client’s project. The model is straightforward and can be tweaked to add or subtract various budgets and other line items.
To access our full guide to building a feasibility and the Lateral Partners' Model, download our Development Finance Basics Guide.
Lateral Partners are happy to walk you through the feasibility process or discuss development finance for your project anytime!
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