In our opinion, good computer software for the financial feasibility for property developments is, among other things, capable of generating an appropriate variety of comprehensive feasibility reports to help one determine whether one should purchase a particular property for development for profit. In this article, our main focus concerns the importance of reviewing the cashflow reports for the feasibility of property development proposals in our company’s Feastudy software but first, for some context, I will mention what we regard as the most critical report in that software.

The Categorised Profit and Loss report is the most important development feasibility report in Feastudy in our view because, after processing the set of data that is entered into a Development file in the app, it provides, inter alia, an ‘executive summary’ concerning:

  1. all of the incomes, costs and funding by category;
  2. the profit or loss amount; and
  3. the key performance indicators (KPIs), margin on development cost (MDC) and the internal rate of return (IRR);
for the proposal in question.

When all relevant data has been entered for the file, this report gives a ‘snapshot’ of the overall feasibility of the proposed development as if the development has been completed and all its developed components have been sold and settled. It is also based on the results of the application’s Categorised Cashflow report for the Development file. (An example of the Categorised Profit and Loss report in PDF format can be viewed here.)

The second most important development feasibility report in Feastudy, in our opinion, is the Categorised Cashflow report because it displays, in an almost graphic way:

  1. the start and end months/quarters/years of each category of cost and income, and
  2. when and how much funding of the development occurs from debt and equity,
based on the data set entered in a relevant Development file.

This report involves a dynamic analysis in that it can provide information based on month-to-month changes in the flow of development funds and projected financial events that are relevant to the development’s cashflow period.

Studying the Categorised Cashflow report can be very helpful for checking whether or not the cashflows for projected Construction Costs begin before the settlement of the purchase of the Land Cost(s) for the proposed development under consideration. For example, a financial institution, which is expected to provide all development finance for the proposal except for the Land Cost, requires its funding to be secured by a mortgage, which is registered on the certificate of title for the development property prior to advancing any part of that finance to the developer for Construction Costs. In such a case, the entered data in the Development file, and the relevant Categorised Cashflow report for the proposal, should reflect the relevant timing of these costs. (An example of the Categorised Cashflow report in PDF format can be viewed here.)

Another example of the need to study the timing of the costs and income in the Categorised Cashflow report, for a development that relies on external finance, is that Borrowing Interest (interest costs) can be under- or over-stated by the incorrect projection of the proposal’s Sell-On Income, relative to when the Construction Cost cashflow(s) end. With regard to Australian real estate developments, it is usually (if not always) the case that deposits and settlements from sales of components of the developed property cannot be realised by the developer until after those components have new certificates of title, which can only be issued after a relevant certificate of practical completion for the said components is given by a relevant professional. Also, while deposits from development sales are held in an Australian conveyancer's trust account for the purpose of applying them at settlement of those sales, they are, either always or at least usually, not repaying external debt finance and/or reducing interest costs payable to a development financier. Thus it is our company’s policy to suggest to Feastudy users, who study proposals for one-stage-only developments of Australian property and ask us why their Borrowing Interest is low when they have their Sell-On Income occurring before the last End Date for their Construction Cost item(s) in their studies, that they consider making each entered start date of their Sell-On Income items for all newly developed component(s) at least one month later than the said last End Date.

Yet another reason that the Categorised Cashflow report is important is that financiers usually require the developer to provide a relevant cashflow report as part of his/her application for development finance for a development.

Another very important development feasibility report in Feastudy is the on-screen Itemised Costs Cashflow report, which displays the monthly/quarterly/annual cashflows for each Development cost item, including borrowing interest costs. For example, the cashflows for each of six Construction Cost items entered in a feasibility file are displayed in six separate rows in this report instead of being summed in one row like these items would be in the Categorised Cashflow report. The Itemised Costs Cashflow report can assist in the chronological planning and scheduling for each cost item and it can be exported to CSV file from Feastudy Professional for use in a spreadsheet app. (An example of the Itemised Costs Cashflow report in PDF format can be viewed here.)

In summary, while the Categorised Profit and Loss report of Feastudy has primary importance for the overall summary of the financial performance of a development, the software’s Categorised Cashflow report provides: very valuable information on how the Categorised P&L’s figures are calculated, and demonstrates how the entry of dates for certain costs incomes can affect the proper assessment of the feasibility of a development. In addition, the Itemised Costs Cashflow report can give very detailed information on the cashflow effect of the data contained in individual development cost items and assist in the scheduling of funds for those items.

(The discussion of the Feastudy’s cashflow reports ends here.)

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Mark Andrews
Managing Director
Devfeas Pty Ltd