Mathematical models inherently operate under a set of parameters, and thus a set of assumptions. This model has been designed to mirror the timeline concept of the land development process to the greatest extent possible. The LDM assumptions and parameters are set forth here:
1). The first day of the construction stage corresponds to the day model calculations begin. The model assumes the initial land purchase is made on this day – so the first day of the first month is the first day of construction AND the day the initial land purchase is made (see Period 1 on the interest calculations and cash flow pages). This is also the earliest day the bank will disperse the initial construction draw (see line 60) and if applicable, the day the builder deposit for Phase 1 is available to the investor (see lines 13 and 21).
2). Costs associated with negotiation, planning and permitting should be entered to the model only to the extent the costs are incurred by the investor. These costs, if applicable for a given project, are “pulled forward” in the model because they occur before the start of construction and before the initial land purchase. Engineering costs are planning and permitting costs. See lines 27, 28 and 29 of the LDM Input page. Such costs are sometimes incurred by the landowner or others, typically resulting in a higher land cost for the investor. In such cases these costs are not entered to the model.
3). The 'construction and holding' period can be no less than one month, no more than eleven months, and the completion of subsequent phases, if any, are timed to the extent that there is no interruption in the availability of lots until all lots are sold. See lines 30 and 31.
4). The entire inventory of lots must be sold within a ten year (120 month) time period and there can be no more than three phases.
5). Beginning with the first lot sale, the absorption rate remains constant throughout the project on a monthly basis. See line 34.
6). Average sale price per lot (by phase, if applicable) are used in model calculations (includes subdivision lots and, if applicable, frontage lots). See lines 4A through 11A.
7). Average development cost per “subdivision” lot (by phase, if applicable) is used in model calculations. See lines 24, 25 and 26. Any costs associated with “frontage lots” should be entered as a lump sum under Stage One costs. See lines 27, 28 and 29.
8). Given a one phase project, the cost of the land for Phase 1, less seller financing if applicable, is recognized the day construction begins. Payment of development costs coincide with the month in which the first lot is sold.
9). Given a two or three phase project, the cost of the land for Phase 1, less seller financing if applicable, is recognized the day construction begins. Payment of development costs coincide with the month in which the first lot is sold. Payment of development costs of Phase 2 and Phase 3, and the cost of any optioned land, coincides with the month the first lot is sold in the corresponding phase.
10). The amount of seller financing cannot exceed the minimum dollar contribution required of the investor. See lines 47 and 51.
11). Interest on a seller financed loan is paid monthly and the principal amount is paid in full at the end of its term.
12). Return of the owner's equity contribution is paid at the end of the project.
13). The LDM assumes the appraised value mirrors the cost of goods sold for Phase 1, plus the cost of residual land if applicable, plus the investor’s cash-in requirement.
14). The subdivision is financed by the investor’s initial cash contribution and an acquisition and development loan from a bank. Additional financing may come from a seller loan and, in the case of phased projects, internal financing through retained earnings may occur (see #15 for the description and definition of retained earnings as it pertains to the model).
15). Given a two or three phase project, in the event the initial or subsequent bank loan is paid off prior to the beginning of the subsequent phase (e.g. the month the first lot in the subsequent phase is sold), cash accrues at the bank’s principal reduction percentage requirement during the time the loan is paid off and the beginning of the subsequent phase when construction funds are drawn. The accrued cash is, or is likened to, retained earnings and allows for full or partial internal financing of future phases (e.g. reduces the amount borrowed from the bank for construction of future phase(s).
16). Annual interest expense is based on the allocation method of
accounting. Interest not allocated/expensed in any given year is carried forward to
the subsequent year.
18). The principal amount of the seller financed loan, if any, is not paid down on a lot by lot basis. The full amount of the loan is paid at the end of its term.
19). Relative to the output tables, the year that the first lot sale occurs is Year 1. For instance, if construction begins in October and the first lot sale occurs in March of the subsequent year, the subsequent year is Year 1.
An understanding of these assumptions and the model limitations will allow the user to more effectively interpret model results.
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Land Development Model, LLC
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Medina, OH 44256