LDM Input Page - A Tutorial
This is the "look and feel" of the model's input page. It is the one and only page where data is entered unless you choose to use the take off page to pencil in some field notes before going digital. Links are used to jump around the website to describe and illustrate how the model works.
Data entry is easy. A couple times through and you will have it. Again, the input page is the one and only page for data entry? More specifically, the input column is the one and only column that data is entered. Scroll down to this column - the white fields are the entry points.
The land development components such as number of phases, number of lots, average sale price of lots, and so on down the line are displayed in the second column of the input page. The components are categorized under headings such as lots and phases, land cost, timing of land purchases, sale costs/builder deposits, options, and project type. See list of components.
The prompt column is where directing, correcting, and model consistency prompts assist you in the data entry process. For instance, note that line 8 in the prompt column (a correcting prompt) indicates '< OK'. This is because line 4 and line 8 of the input column are equal, or consistent. Had they not been, the prompt would have been '< Error, lines 4 and 8 must be equal'. Click here to see how prompts direct data input and alert you to entry errors and model inconsistencies.
The output tables and schedules column is where you navigate to model results such as annual profit and cash flow tables, a project summary table, a profit by phase table, etc. Simply click on the output you wish to see. Click to go to the model output page.
There are three field-clearing macros and one auto-entry macro incorporated to the input page. Although it is not mandatory to enable them, they make data entry easier and more efficient. One of the field-clearing macros clears all model input with one click on the clear all variables button. Another clears absorption and interest rate entries, thereby enhancing 'what-if' analysis. The third one clears entries for total acres and acres per phase. Finally, the auto-entry macro inserts the four typical lender requirements to the model. You can manually alter these auto entries depending on actual lender requirements.
The convenience of the macros will become self-evident as you conduct 'what if' analysis on the many land development components and begin to routinely save various project scenarios.
See input fields below. This is a 3 phase project with 91 lots. 27 lots is Phase 1, 33 lots in Phase 2 and 31 lots in Phase 3.
See input fields below. The total land cost is $1,626,000 with the cost of each Phase allocated as noted. The builder is putting up deposit money for all three phases and project (type) is a three phase project with an option to purchase the phase 3 land.
Note that What If analysis can be used to isolate how much a developer or investor can pay for raw land while meeting pre-determined profit criteria. Appraisers can use the LDM to estimate or support land value. Click here for an example.
A note about project type. The model allows for analysis of one, two, or three phases, as well as the analysis of land options. Of course the land purchased for a one phase project cannot be optioned. On a two phase project, the land for both phases can be purchased at once or an option can be negotiated for the phase two land. A three phase project has four possible land purchase possibilities. A drop down menu with the seven project types is provided on line 14 of the model. Click for a discussion of project types.
Click here for a discussion and ilustration of how real estate options affect interest costs and profitability.
The average sale price of Phase 1 lots is $75,000. The average sale price of the Phase 2 lots is $76,000 and the average sale price of the Phase 3 lots is $72,500. Sale costs total 4 percent of gross revenue. Builder deposits are $200,000 for Phase 1, $225,000 for Phase 2 and $175,000 for Phase 3. Click here for a discussion and illustration of how builder deposits impact interest cost and profitability.
Note that the Profit Summary is visible on the LDM Input page. These measures, and many more, are displayed on the model's output pages, but also here. Click here for a discussion of profit measures displayed on the LDM Input Page.
The average development cost of Phase 1 lots is $35,000. The average development cost of the Phase 2 lots is $34,500 and the average development cost of the Phase 3 lots is $28,000. Lines 28, 29 and 30 are entry points for costs not included in the average cost estimates (e.g. possibly real estate taxes, cost of options, cost of permitting, extraordinary offsite cost, etc.). Note that these quantities are entered in dollar amounts (not per lot amounts).
The construction of Phase 1 begins March 1 and the first lot sale occurs on August 1. The duration of the initial construction period has a significant impact on project profitability. The shorter the construction period, the more profitable the project. In other words, the shorter the construction period the faster you can begin the business of selling lots. However, the developer often has little control over this component. Construction may be delayed for a variety of reasons - weather conditions, permitting issues, material shortages, contractor problems, and so on. The construction and holding period can be adjusted from one to eleven months.
The absorption rate is 1 lot per month. Note the minimum absorption rate below line 36 that is auto-calculated and the comments regarding the clearing of absorption on line 35 and interest rates on lines 37 through 41. There is a Clear Absorption macro provided to expediate this requirement. Click here for a discussion and illustration of how the absorption rate impacts profitability.
The interest rate that accompanies an acquisition and development loan generally is tied to a published rate such as the prime rate. The model allows the user to factor the interest rate trend, up, down, or flat, into the profitability estimate.
Below the interest rate on the bank loan is 6 percent. The estimated trend calls for a 1 percent increase in year 2 remaining stable for the remainder of the project.
Most land developments are financed with a bank loan. Naturally banks have a set of lender requirements upon which the loan is based. For instance, they will require that the loan is paid off by the time a certain percentage of lots are sold. They will require that a certain percentage of the revenue from each lot sale be applied to loan reduction. They will require the developer to contribute, in cash and/or subordinated loans, a certain percentage of the initial cost of the project. Another way to say this is, the bank will lend up to a certain percentage of the initial cost of the project. And finally, in the case of a phased project with no option agreement(s), the bank will lend a certain percentage on residual land (land purchased up front by the developer to be used for future phases).
Typical rates are as noted but they vary from lender to lender. Macro provided. Note that line 43 should be modified to roughly equate the model result and lender requirement.
Many times it is difficult for a developer/investor to come up with the initial cash requirement. This problem can, and often is, resolved if the landowner agrees to provide seller financing. In this case seller financing is available in the amount of $300,000 at 4 percent for 5 years (60 months). Note the model parameters on lines 49 and 52. Click here for a discussion and illustration of how seller financing affects profitability.
One of the model assumptions is that the developer's ownership is in the form of a pass-through entity (e.g. S-Corp, LLC). As such the entity is not taxed, but project income flows through to the owner personally and is taxed at his or her marginal tax rate. No matter what the investor's filing status or percentage ownership, all owners deal with profit before tax. With this in mind, the focus most often will be on the before tax numbers generated by the model.
The model allows owners to calculate individual tax liability by entering applicable percentage ownership and filing status on lines 53 and 54. These entries are not mandatory for model calculation results.
In this case there are 102 acres in all three phases and the developer/investor must purchase Phase 1 and Phase 2 up front while maintaing an option to purchase Phase 3. Note the prompt column directives.
Like income tax entries, total acres and acres per phase are not mandatory input entries. This is to say that the profit and cash flow calculations will be unaffected if entries are not made here. The project summary table is enhanced, however, if entries are made on line 55 and lines 57 through 61.
Talk of per acre prices is commonplace in the land business, but price per lot is actually a much more important measure.
The model consistency section of the model alerts the user to inconsistencies as well as entry and non-entry errors. It also prompts and directs you to the entry inconsistencies and/or omissions. All output displays should be Yes or N/A or you have made one or more entry errors. This is how the model consistency section will look if the input column is completed properly.
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Land Development Model, LLC
302 West Lafayette Road
Medina, OH 44256