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Development holding costs

Discussion in 'Development' started by MrsNixba, 30th Mar, 2016.

  1. MrsNixba

    MrsNixba Well-Known Member

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    When calculating feasibility for a development site, why are the holding costs for the first 12 months not included?

    The answer I have received when I asked someone was that the property is held as a regular negatively geared property until ready to bulldoze and only then does the property become a development site. I then asked for further feasibility reports to include holding costs for the first 12 months, to which the response was no, as the profit would be watered down to a point where I will 'never do a deal.' Needless to say, this person already has my BA fee (which was not included in their 'acquisition costs' on the feasibility report until I requested it, nor were their project management fees included in the costs until requested). I'm pushing pretty hard for a decent site by questioning every single number they put in front of me and yes they can often get defensive and make me feel stupid when I believe I am asking valid questions. EVERYBODY should question every single number put in front of them. Business is business and if a deal or calculation makes you feel uncomfortable, any investor worth their salt would encourage you to question it.

    Every investor knows that people choose which numbers to share to encourage the outcome they want.

    Just as journalists choose which information to share to encourage the hype/fear they want.

    Can others shed light on my above question? Is it typically the norm to 'overlook' holding costs in the first 12 months while going through council in a feasibility calculation? It seems counterintuitive to me but happy to hear other perspectives.
     
    Last edited by a moderator: 30th Mar, 2016
  2. Leo2413

    Leo2413 Well-Known Member Premium Member

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    I have heard of BAs not including all the costs to make it easier for them to find a deal where the 'numbers stack up' for a client who often is at their mercy. I know a friend who is just going through this very thing and when she showed to me the BA's feasibility (which they include as part of the deal claiming to be experts) it hadn't included holding costs, BA fee, council fees and 1 or 2 other things. I told her its BS and they need to include all known costs to date and reasonable projected costs otherwise the real projected return on Total Development Costs is already way out even before the projects begins.

    Edit: and I think they never included agent sale fees too.
     
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  3. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    No. Developer is still paying the cost. Deduct the income from tenancy if rented and tax refund NG if doing so.
    You might have an exception, if you are staying in the house when subdividing PPOR because there is no cost incurred.
     
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  4. MTR

    MTR Well-Known Member Premium Member

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    read your contract
     
    Last edited by a moderator: 30th Mar, 2016
  5. MrsNixba

    MrsNixba Well-Known Member

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    Thanks @Leo2413 and @Skilled_Migrant , very helpful. So unless we have the same BA, it's not just me. This one claims to include all fees such as council etc but it isn't broken down at all so I have no way of verifying the costs, or which costs are included. Makes me very uncomfortable. When I asked how many of their projects have come in at or under budget, they just said they've never lost money on a development. Again, this doesn't answer the question - you can make money in a rising market if you blow out the budget. Doesn't tell me if the projected costs stacked up against the actual costs.

    @MTR - great advice. Might need to revisit it and keep asking questions.
     
  6. Leo2413

    Leo2413 Well-Known Member Premium Member

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    I wouldn't feel comfortable with that either. I would ask for an itemised break down where possible which wont take them more than 3 minutes to do if there is nothing to hide. At the end of the day you are the one with all the financial risk so I would be checking everything they do as much as possible.
     
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  7. MrsNixba

    MrsNixba Well-Known Member

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    Exactly why I said the DD is my responsibility and mine alone. I didn't just ring you, I rang many potential mentors and sourced as much feedback as I could. Your recommendation was valued, hence it was followed and I put my money there. I didn't just ring development businesses, I rang people I considered successful. I don't see how that is offensive?
     
  8. MrsNixba

    MrsNixba Well-Known Member

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    I'm not comfortable either but I'm also sick and tired of questioning everything and having questions dodged / wilfully misinterpreted.
     
  9. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    Ask on this forum. There is a lot of experience and goodwill.
     
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  10. Cactus

    Cactus Well-Known Member

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    Great post.

    No it's not normal. If the site is bought for the rest mediate purpose of development, the. Holding cost and purchasing cost should be included from date of purchase to date of sale

    Only if it is a already owned site that you are going back to to develop could you consider wiping the slate clean.

    If the deal is only worth doing because the numbers have been manipulated then it's not worth doing.
     
    Last edited by a moderator: 30th Mar, 2016
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  11. MrsNixba

    MrsNixba Well-Known Member

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    For those new to this thread - I did not type the original post in the form that it appears above. It was plucked out of context from another thread and some phrases have been slightly altered to make it appear new / or to remove the content that incited the original post. This was done without my consent or prior knowledge by what I assume to be a moderator.

    @Skilled_Migrant and @Caltan and @Leo2413 - Now that I am re-evaluating my strategy and support team, what is your advice moving forward? Based on how this thread came to be, I can now see that there is quite a lot of censorship on this forum and hence the information is not as reliable or authentic as I once thought, as rigorous discussion is discouraged. I am happy to pay for skilled advice and genuinely would like to learn this process, so I guess it's back to Square One for me...
     
  12. MTR

    MTR Well-Known Member Premium Member

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    I always seek 6-8 months settlement this is not unusual.

    Unfortunately some porkies again.....I am also aware that this was also on the table .??

    plans and permits can be acquired during this period.

    Some people don't need a good team, some people should not develop because they either have not enough money, unrealistic expectations and no one can help them.

    I know someone from SS who used 2 BA in Perth, 1 in Melb and they all told him to puss off, too hard basket...OMG, I can't believe I said that...true though..lol
    I bet you know who it is:)




    mtr
     
    Last edited: 30th Mar, 2016
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  13. mrdobalina

    mrdobalina Well-Known Member

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    I personally don't include holding costs in assessing feasibility of developments. I use discounted cashflow analysis. Holding costs are already factored into the weighted average cost of capital, or discount rate.

    An example is if you purchased a site or funded a development using cash, then there are no holding holding costs. But if you funded it using debt, then holding costs are included. This is a false fallacy, as there is still a cost to using the cash (opportunity cost).
     
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  14. MrsNixba

    MrsNixba Well-Known Member

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    @MTR 6-8 months settlement is good - we've been trying for something similar but often the vendor, at the last minute, swipes the long settlement out from under us. Or at least has been the case thus far.

    And yes I agree - some people should not develop for a whole variety of reasons, but those that do must start at the bottom and unfortunately often those that make it to the top forget how difficult it can be to get the ball rolling. No idea who you're referring to from SS, but an interesting anecdote and one I'll keep in mind moving forward.

    @mrdobalina - in our case, the property will be funded using debt and so will incur costs (less rental income) depending on time it takes for DA etc. Hence, I would imagine these costs are calculated?
     
  15. MTR

    MTR Well-Known Member Premium Member

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    it's absolutely not unusual to get 6 months in Melb, however we now have a shortage of deve sites and huge demand from developers, it won't get any easier IMO as its a sellers market, these terms may be difficult today
     
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  16. mrdobalina

    mrdobalina Well-Known Member

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    No. I'm saying I don't include holding costs in the feasibility assessment, regardless if it's debt or cash. The impact is that the hurdle rate is higher to get projects over the line.
     
  17. Leo2413

    Leo2413 Well-Known Member Premium Member

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    Hey @MrsNixba,

    I don't know about others but for me I include all costs that I incur from the deal and input it in my feasibility from the time I bought the site. So any holding costs where rent is less than the interest paid, I include a rough figure in my feasibility. And definitely the BA fees, and PM fees I would include in a feasibility if it was mine.
     
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  18. Leo2413

    Leo2413 Well-Known Member Premium Member

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    But what if you have a holding costs of say 80k for 2 years holding, would you not include that?
     
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  19. MrsNixba

    MrsNixba Well-Known Member

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    Took the words right out of my mouth @Leo2413 - this is the bit I'm struggling with as I'm getting similar answers from my BA and feeling uncomfortable. What if it's a slow council and approval takes longer than expected?
     
  20. mrdobalina

    mrdobalina Well-Known Member

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    Because interest costs are already factored into the discount rate, which assesses it over the entire period of investment.

    Here's the flip question - If made the investment using cash, then you don't have 80k of holding costs. Why is it not included here, but included if you use debt? Capital is capital, and capital has a cost. That cost of capital is factored into the discount rate.

    Discounted cashflow analysis is one of the methods used by many companies to assess and compare investments (I've personally used it to help clients to assess hundred million dollar investments). I don't see how property development is any different.
     
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