Development holding costs

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

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  1. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    • I do not think moderators have done it with a view to censor but to untangle a lot of simultaneous issues not to mention a lot of heat that it was generating.
    • You are not exactly back to square 1. @MTR has given you a way around holding cost (alongwith the difficulty associated with it) and @mrdobalina has given you an alternate viewpoint of assessing the project feasibility (along with the advantage and disadvantage ). I do not agree with @mrdobalina POV but both are correct depending on our situation and goals. I think for the first project as much upfront certainty as possible (and then a 10-20% buffer) is required.
    If you share the kind of project you are after, others will be able to offer specific advice or share their experiences.
     
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  2. Sackie

    Sackie Well-Known Member

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    OK I see what you mean, though I prefer to calculate it a little differently.
     
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  3. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    I do use holding costs from day one, though in a project such as a SMSF I probably have written that it has none which is true and untrue at the same time.

    I use my own spreadsheets for feasibility. You can take the feasibility figures that your BA gives you and make them more granular if you wish and model different scenarios.

    For example my spread sheet will have 3-4 possible scenarios for a site - four single level 3 bedroom dwellings, three single level 4 bedroom dwelling, five two bedroom dwellings etc etc

    And I will run those scenarios side by side against the known items including a contingency amount for items you might not know OR items which blow out in cost.

    Then the scenario with the most profit usually wins - or the one which suits my budget. The backup scenarios as useful in case the Council has heavy opposition to the project and an alternative is needed.
     
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  4. Sackie

    Sackie Well-Known Member

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    You can also do a sensitivity analysis in your feaso projecting end sales say eg 1mil then 1.50, 1,1m etc and the same for sliding costs, giving you an idea of how the returns/margins can change and how sensitive they might be. Just something I like to include in mine and is simple to do.
     
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  5. mrdobalina

    mrdobalina Well-Known Member

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    How do you compare a project that returns 40% over 4 years, versus a project that returns 20% in 18 months?
     
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  6. MTR

    MTR Well-Known Member

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    ROI is generally ignored but as you can see important to bottom line
     
  7. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    Do what wise men have done over centuries
    • Ask the wife.
     
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  8. MTR

    MTR Well-Known Member

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    LOL, wise man
     
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  9. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Now that's a whole other level.

    Sometimes you can take a very simplistic approach and divide by 4 for a 4yr project vs a 1 year project. By no means is that perfect but it's fine for back of the napkin work and can help you compare your pink lady apple with a granny smith.

    I've been reading up a bit on longer term ROI this year as I'm taking on a 4yr project and want to be able to assess and calculate at a better level.
     
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  10. mrdobalina

    mrdobalina Well-Known Member

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    It's actually very simple - discounted cashflow analysis.
     
  11. Cactus

    Cactus Well-Known Member

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    Estate master uses discounted cash flow to calculate a NPV but Also factors in holding costs to calculate an IRR.

    Many large developers use this software.

    Holding costs are not limited to interest. Rates and land tax for example are costs regardless of wether or not you are playing with cash.

    If you are developing with debt and ignoring your interest costs whilst waiting for permit / pre sales / bank finance / tender award then you will not be making as much money as you think you are.

    A bit like the people that shoot the **** around the bbq about turnover. Who cares about turnover. Give me net profit.
     
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  12. Blacky

    Blacky Well-Known Member

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    I guess it somewhat depends on the stage of feaso you are at.

    In the beginning getting too detailed is a waste of time IMO - as there are too many unknowns. Overtime you get a fairly good 'broad' idea of the dev costs.
    The breakdown is very high level - e.g.
    Purchase costs
    Construction
    Holding
    Selling

    The "construction" would include everything from the time it settles to the time keys are handed over (excluding holding costs). As you move forward with the feaso you will add in additional detail and break this down further.
    Without knowing what, exactly, you are going to build it makes doing a full detail feaso very difficult, and generally a waste of effort/time.
    The feaso Westminster and I did, literally on the back of an envelop, was as accurate as the detailed version we completed about 8months later following full research and DD (including builders quote)*. You could argue we got lucky - we will argue we are damn good :)

    In some cases holding costs, up to the point of demolition, would be excluded as many developers will buy today - develop in 3-4-5years time.

    Long story short - it all depends.
    Dont rely on someone else's feaso. Do your own. Give everyone on this site the task of developing a feaso for a given property and you will have as many different answers as member (and probably a locked thread at the end of it :p)

    Blacky

    * doesn't include the limestone rock we found during site prep - but our contingency should have us covered on that - we just can't have any more 'surprises'.
     
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  13. Sackie

    Sackie Well-Known Member

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    SURPRISE!!

    imagesOHNI3MUR.jpg
     
  14. MrsNixba

    MrsNixba Well-Known Member

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    I think my next piece of homework is to better understand this concept. The BA hasn't mentioned it, I gave his justification above, but nonetheless it sounds valuable and worth knowing. Thank you for this.

    Looking at 3,4,5 townhouse development in Melbourne in an entry level suburb. There is already a wealth of information and anecdotes of experience on this site, and perusing it gave me the confidence to move forward.

    So how do I balance this with the conflicting priority of feasibility breakdown? As somebody else mentioned, it can be a waste of time to do a full breakdown, but as a noobie paying good money for the service, isn't it reasonable that it's done and all factors considered? Particularly if BA has also said he educates and empowers his clients to be able to do this themselves - how can I learn if I don't know how he reached the figures on the report he sends me? I shouldn't have to come on here and burden everybody else for the answers when I've already paid him to provide them.

    I apologise if I sound dense - just trying to learn from the collective wisdom on this site and as somebody else mentioned, there are as many methods as there are users. As I mentioned on another thread, I'm at the point of frustration with this process and its lack of transparency before I part with large sums of hard earned money. Just trying to find the best method (both of development and feasibility) for us.

    Thank you all sincerely for your advice and wisdom, much appreciated.
     
  15. Sackie

    Sackie Well-Known Member

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    The good news is your not experiencing anything unique - frustration/anxiety is quite normal with developing I have found.

    The bad news is there is a ton more of frustration to come before the project is completed.

    It's an ongoing, out of comfort zone, rollercoaster process of learning, anxiety, stress, more learning and learning and stress, stress, joy and more joy then some final anxiety before project is completed. Then hopefully champagne time! ! Or vodka..depending..

    Enjoy it. :D
     
    Last edited: 31st Mar, 2016
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  16. Cactus

    Cactus Well-Known Member

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    For your first development I would use as much detail as possible. If your paying someone I would expect full detail to be included.

    If I am assessing something then yes I use back of envelope assumptions. Then if I get under DD I do a detailed assessment.
     
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  17. MrsNixba

    MrsNixba Well-Known Member

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    I expected it to be so, that's why I tried to surround myself with a good, supportive team, and pay for services rather than expect hand outs. I thought this might reduce some of the stress, but I guess the pay off of that is a lack of control / at the mercy of those who now hold my cash. But yes, some champagne and chocolate at the end is certainly in order!

    Will definitely push harder on this. Thanks for the advice. I guess I'm easily shut down when made to feel like I don't know what I'm talking about but now that I know my questions are, at the very least, valid, I can push forward knowing that it can only make things better. Thank you :)
     
  18. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    At the risk of prying, what is your expectation from the BA or for that matter your brief to them.
    Feel free not to answer.
     
  19. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Just remember @MrsNixba that you are still presumably in the finding site stage so the feaso is somewhat high level. One cannot do a detailed feaso on every possible project.

    As @Caltan said that can be best done once a site is secured with a Due Diligence clause in the contract or once the the basic feaso passes your requirements.
     
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  20. Sackie

    Sackie Well-Known Member

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    @MrsNixba Personally I don't think your asking too much at all from your BA in this early stage of feaso if your asking for all the major costs including holding costs, BA fee, PM fee etc to be included. That is more than reasonable to have included in a 'back of envelop' feaso and is nothing hard or too detailed to include right from the beginning imo. And your time frame to start is 12 months not 3,4,5 years in the future so I would want to err on the side of being conservative. But like @Blacky said, 10 chefs cooking the same thing will produce 10 different flavours.
     
    Last edited: 31st Mar, 2016
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