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 land development process is a three stage process consisting of a 'negotiation, planning, and permitting' stage, a 'construction & holding' stage, and an 'absorption or selling' stage. Day 1 of month 1 of the model is the day of the initial land purchase and the first day of the 'construction & holding' stage. This is the day the first bank draw occurs and when interest begins to accrue. Note that permitting and preliminary planning costs are incurred prior to month 1. Often payment of these early costs can be deferred to or beyond day one of the initial land purchase. In this model, these costs, along with the construction cost of Phase 1, are recognized as being paid on the last day of the 'construction & holding' period.
2). Land cost entered to the model is on a per phase basis. Land cost is allocated on a per lot basis for each individual phase.
3). The 'construction & 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.
4). If you use the one-step feature of the model, beginning with the initial land purchase, 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. Thus, depending on the length of the construction and holding period, the maximum absorption period will range from 109 to 119 months. Setting aside the one-step feature, you may use the model to analyze a project with any number of phases, one phase at a time.
5). Beginning with the first lot sale (the beginning of the 'absorption' stage), the absorption rate remains constant throughout the project on a monthly basis.
6). 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.
7). Average sale price per lot and average per lot development cost (by phase, if applicable) are used in the input/output calculations. Note that development cost, within this model, include permitting and planning cost, allowance for real estate taxes and administrative expenses, as well as traditional hard and soft costs of development.
8). Payment of the full development cost, and cost of the land if it was under option, for any particular phase coincides with the month in which the first lot in that particular phase is sold. The cost of the land for Phase 1, less seller financing (if applicable), is paid out in Month 1 of the project.
9). Based on the primary lender's loan requirements, the amount of seller financing, if any, cannot exceed the minimum dollar contribution required of the developer.
10). 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.
11). Profit and return of the owner's equity contribution is paid at the end of the project.
12). The subdivision is financed with an acquisition & development loan. The A&D loan(s) within the LDM includes the bank loan, the seller loan (if any), and equity rollover. See assumption #13 for the description and definition of equity rollover as it pertains to the model.
13). When dealing with a phased project, in the event the initial or subsequent bank loan is paid off prior to the beginning of the subsequent phase, project equity accrues at the bank’s principal reduction percentage requirement during the time the loan is paid off and the beginning of the subsequent phase (i.e., the month the first lot in the subsequent phase is sold). The accrued equity is referred to as 'equity rollover' and may be likened to internal financing through retained earnings. If this occurs during a given project, it in effect reduces the amount borrowed from the bank on the subsequent phase(s).
14). The developer/investor's ownership is in the form of a 'pass-through' entity (i.e., S-Corp, LLC).
15). 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.
16). The total per phase amount of the builder deposit, if applicable, is recaptured equally over the total number of lots within any given phase.
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
302 West Lafayette Road
Medina, OH 44256