Real Estate Development M Deal Summary and Cash Flow Model Home > Resources > Knowledge > Financial Modeling > Re Development Model What is a Real Estate Development Areal estate development model usually consists of two sections: tr Summary and the Cash Flow Model. Within the Deal Summary, all in assumptions - including the schedule (which lays out the timeline), }The Cash Flow Model begins with the revenue build up, monthly ex; financing, and finally levered free cash flows, NPV (net present value (internal rate of return) of the project. In the following sections, we \ through the key steps to building a well-organized real estate develc model. Deal Summary 1. Schedule and Property Stats The first step in building a real estate development model is to fill in assumptions for schedule and property stats. Here is a list of items be included:2. Development Costs For the next step in creating a real estate development model, we w assumptions for development costs in terms of the total amount, cc and cost per square foot. Development costs might include land cos costs, servicing, hard and soft contingency, marketing, etc. Using the stats filled in earlier, we can calculate all the numbers and complete development costs section. The section should look something like tImage Source: CFI's Real Estate Financial Modeling Course. 3. Sales Assumptions$500 per square foot is a realistic starting point for the sales price. V use this as the driver for revenue. After calculating sales (totai, $/un commissions (e.g., 50%), and warranty, we can figure out the net pr« this project. 4. Financing Assumptions For financing, there are three critical assumptions: loan-to-cost peri interest rate, and land loan. Before calculating the total loan amount, we need to figure out the t development cost amount. Since we have not yet calculated the inte expense, we can link the cell to the cash flow model for now and ob once the cash flow model is filled in. The commissions are the same commissions in the sales assumptions section. The total developme be calculated as: Total Development Cost = Land Cost + Development Cost + § Interest and CommissionsThe Max Loan Amount obtained for this project = Total Develop Loan to Cost Percentage Equity amount = Total Development Cost - Max Loan Amount.Image Source: CFI’s Real Estate Development Model Course. The figures above will be the assumptions from the Deal Summary we complete the Cash Flow Model, we will come back and complete Development Pro Forma section and add a sensitivity analysis. Cash Flow Model 1. Revenue Build Up The first step in calculating revenues is to find out the townhome at closings. Absorption is the number of available homes being sold di time period, while closings are the number of homes closed once th construction is complete. Now we can build up the revenue using the absorption and closings Townhomes sales = Sales Price/Unit x Townhome Closings First 50% Commissions (charged when homes are sold) = - Towr absorption x Sales Price/Unit x (Commission% /2)Warranty = - Warranty cost/Unit x Townhome closings Total Net Revenue = SUM(Townhome sales + 50% Commissions Commissions + Warranty) (*Note that commissions and warranty are in negative amounts.) 2. Expenses Now we'll find out the development expenses, which include land ac cost, pre-construction spending, and construction spending. The nu found in the development costs assumption section from the Deal § Land Acquisition Cost = Land cost Pre-construction spending = Pre-construction spend ($/month) Construction spending = (Development costs - Pre-construction spending)/No. of months of construction Total Development Costs = SUM(Land acquisition cost + Pre-con spending + Construction spending)3. Costs to Fund and Proceeds to Repay Capital The Cost to Fund is the shortfall in the project cash flow that needs financed. When the total net revenue is less than the total develop there is a negative cash flow that we need to cover. When total net revenue becomes greater than the total developmer will be positive proceeds that we can use to pay back borrowed capi use the following formulas to calculate the two numbers: Costs to Fund = IF((Total Net Revenue - Total Development Cost Net Revenue - Total Development Costs), 0) Proceeds to Repay Capital = IF((Total Net Revenue - Total Develc Costs) < 0, (Total Net Revenue - Total Development Costs), 0) 4. Financing Next, we calculate the loan balances, draws, repayments, and intere The table below summarizes the calculations for the first period anc following periods:= Land Loan Amount = IF(Date > Constructie 1F(Opening Balance < Ma Costs to Fund, (Repayments) = -MIN(Proceeds to Payback Capital, | = - MIN(Proceeds to Pa’ Opening Balance + Interest Accrued) | Opening Balance + Inte Interest Accrued | = Opening Balance x Interest Rate /12 | = Opening Balance x Inte Ending Balance = SUM(Opening Balance, Draws, = SUM(Opening Bala Repayments, Interest Accrued) Repayments, interes We should also perform a quick sanity check to ensure none of the« balances exceeds the max loan amount. 5. Free Cash Flow and IRR We can now calculate the levered free cash flows and resulting IRR ¢ project. Levered Free Cash Flow = SUM(Costs to Fund, Proceeds to Paybi Loan Draws, Loan Repayments)Equity Balance is simply the cumulative FCF: The first-period balance = Levered Free Cash Flow Following period balances = Previous Balance - Levered Free Ca Finally using the XIRR formula, we can calculate the Levered IRR for Levered IRR =XIRR(All Levered Free Cash Flows, Corresponding 1Image Source: CFI's Real Estate Financial Modeling Course. More Resources Thank you for reading CFl's guide to Real Estate Development Mode learning and developing your knowledge of financial analysis, we hig recommend the additional CFI resources below: Financial Modeling Best PracticesINear Lovate yun vernure Types of Financial Models Get Certified for Financial Modeling (FMVA)® Gain in-demand industry knowledge and hands-on practice tl you stand out from the competition and become a world-clas analyst. 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