Whatif or Scenario Analysis

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Whatif Analysis

It is very easy to conduct whatif or scenario analysis on any land development component. Simply modify any of the components and the impact on profitability will be calculated by the model. Here are three examples. The partial views of the LDM input page below illustrate the effect of a lengthened construction and holding period. Note that in the first scenario, construction begins in August, and the first lot sale occurs in November (lines 24 & 25). This represents a three month construction and holding period (line 26).

In the second scenario, construction again begins in August, but the first lot transfer is not until July - an eleven month construction period (lines 24 through 26). Note how profitability varies from one scenario to the other. The measured difference is just a few keystrokes away! Save the project scenarios under an identifying filename and move on with your 'what-if' analysis.

It is important to point out that the effect that the length of the initial construction period has on profitability shows up below the gross profit level of analysis. Note below that gross profit under both scenarios is $1,746,600. (Scenario #1 , Scenario #2).

This model allows for below gross profit analysis on construction duration and other development components such as absorption, seller financing, phasing decisions, land option alternatives, interest rate and interest rate trend, and lender loan requirements. This is whatif analysis.

Construction & Holding Period - Scenario #1


		Before changing month below, click the 'Clear Absorption & Rates' macro
	Construction/Holding Period & Absorption
				Profit Summary
24	Mo of Initial Land Purchase	August	< OK
25	Mo of First Lot Sale	November	< OK	Gross Revenue	$6,085,000
26	Construction & Holding Period in Months	3		Sales/Closing Costs	$243,400
27	# of Sale Months in Year #1	2		Net Revenue	$5,841,600
		Before changing absorption click the		Cost of Goods Sold	$4,095,000
		Clear Absorption & Rates' macro		Gross Profit	$1,746,600
28	Absorption Rate Per Month	2	< OK	Interest	$197,985
29	Absorption Rate is:		< OK	Profit Before Tax	$1,548,615
		Minimum Absorption Requirement >	.76

Construction & Holding Period - Scenario #2


		Before changing month below, click the 'Clear Absorption & Rates' macro
	Construction/Holding Period & Absorption
				Profit Summary
24	Mo of Initial Land Purchase	August	< OK
25	Mo of First Lot Sale	July	< OK	Gross Revenue	$6,085,000
26	Construction & Holding Period in Months	11		Sales/Closing Costs	$243,400
27	# of Sale Months in Year #1	6		Net Revenue	$5,841,600
		Before changing absorption click the		Cost of Goods Sold	$4,095,000
		Clear Absorption & Rates' macro		Gross Profit	$1,746,600
28	Absorption Rate Per Month	2	< OK	Interest	$237,600
29	Absorption Rate is:		< OK	Profit Before Tax	$1,509,000
		Minimum Absorption Requirement >	.81

The partial views of the LDM input page below illustrate the effect of different absorption rates on profitability. The lot sales rate in scenario #1 is two lots per month (line 28), and the rate in scenario #2 is four lots per month. Obviously, the faster lots sell the greater the profit.

Absorption is probably the most critical land development component. If lots do not sell at a reasonable pace, profitability suffers significantly. It is important to point out that the effect absorption has on profitability shows up below the gross profit level of analysis. Note below that gross profit under both scenarios is $1,746,600. (Scenario #1 , Scenario #2)

This model allows for below gross profit analysis on absorption and other development components such as construction duration, seller financing, phasing decisions, land option alternatives, interest rate and interest rate trend, and lender loan requirements. This is whatif analysis. whatif whatif

Absorption Rate - Scenario #1


		Before changing month below, click the 'Clear Absorption & Rates' macro
	Construction/Holding Period & Absorption
				Profit Summary
24	Mo of Initial Land Purchase	August	< OK
25	Mo of First Lot Sale	November	< OK	Gross Revenue	$6,085,000
26	Construction & Holding Period in Months	3		Sales/Closing Costs	$243,400
27	# of Sale Months in Yr #1	2		Net Revenue	$5,841,600
		Before changing absorption click the		Cost of Goods Sold	$4,095,000
		Clear Absorption & Rates' macro		Gross Profit	$1,746,600
28	Absorption Rate Per Month	2	< OK	Interest	$197,985
29	Absorption Rate is:		< OK	Profit Before Tax	$1,548,615
		Minimum Absorption Requirement >	.76

Absorption Rate - Scenario #2


		Before changing month below, click the 'Clear Absorption & Rates' macro
	Construction/Holding Period & Absorption
				Profit Summary
24	Mo of Initial Land Purchase	August	< OK
25	Mo of First Lot Sale	November	< OK	Gross Revenue	$6,085,000
26	Construction & Holding Period in Months	3		Sales/Closing Costs	$243,400
27	# of Sale Months in Yr #1	2		Net Revenue	$5,841,600
		Before changing absorption click the		Cost of Goods Sold	$4,095,000
		Clear Absorption & Rates' macro		Gross Profit	$1,746,600
28	Absorption Rate Per Month	4	< OK	Interest	$113,962
29	Absorption Rate is:		< OK	Profit Before Tax	$1,632,638
		Minimum Absorption Requirement >	.76

The partial views of the LDM input page below illustrate the effect of seller financing on profitability. In scenario #1 the seller has agreed to finance $500,000 (lines 40 & 41) at an interest rate of 5 percent for a term of three years (lines 43 & 44), while the seller does not provide owner financing in scenario #2 (line 40). (Scenario #1).

Note that the profit in scenario #1 is less than that in scenario #2. In the case of the second scenario the developer has to come up with the $500,000 in cash because the seller is not financing any of the project (line 40). The costs of phase one land and development are unaffected by the presence or non-presence of seller financing (the lender will loan only a certain percentage of the phase one land and development costs). It is easy to see that seller willingness to help finance a project in the form of a subordinated mortgage can make or break a developer's ability to take on a project.

It is important to point out that the effect seller financing has on profitability shows up below the gross profit level of analysis. Note below that gross profit under both scenarios is $1,746,600. (Scenario #1 , Scenario #2)

This model allows for below gross profit analysis on seller financing and other development components such as construction duration, absorption, phasing decisions, land option alternatives, interest rate and interest rate trend, and lender loan requirements. This is whatif analysis.

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Seller Financing - Scenario #1


	Seller Financing

40	Seller Financing, Yes or No?	Yes	< Yes or No
41	If Yes, Amt of Seller Financing	$500,000	< Enter Amount	Profit Summary
42	If Yes, Amt Must Be Less Than:	$745,075		Gross Revenue	$6,085,000
43	If Yes, Interest Rate	5.00%	< Enter % Rate	Sales/Closing Costs	$243,400
44	If Yes, Term in Months	36	< Enter Term of Loan	Net Revenue	$5,841,600
45	If Yes, Line 44 Must Be Less Than Line 45	46	< OK	Cost of Goods Sold	$4,095,000
				Gross Profit	$1,746,600
	Owner Tax			Interest	$197,985
				Profit Before Tax	$1,548,615
46A	% Ownership	35%	< Enter % Owned
46B	Filing Status	Jointly	< Enter Status

Seller Financing - Scenario #2


	Seller Financing

40	Seller Financing, Yes or No?	No	< Yes or No
41	If Yes, Amt of Seller Financing		< Make No Entry	Profit Summary
42	If Yes, Amt Must Be Less Than:	NA		Gross Revenue	$6,085,000
43	If Yes, Interest Rate		< Make No Entry	Sales/Closing Costs	$243,400
44	If Yes, Term in Months		< Make No Entry	Net Revenue	$5,841,600
45	If Yes, Line 44 Must Be Less Than Line 45			Cost of Goods Sold	$4,095,000
				Gross Profit	$1,746,600
	Owner Tax			Interest	$122,985
				Profit Before Tax	$1,623,615
46A	% Ownership	35%	< Enter % Owned
46B	Filing Status	Jointly	< Enter Status

These are but three examples of 'what-if' analysis. Remember, you can whatif on any land development component, singly or in combination with just a few keystrokes. You may want to evaluate option value, make a decision to design a one, two or three phase project, look at profitability assuming an increasing, decreasing, or flat interest rate trend, see profit under several sale price per lot scenarios, and so on. Save each scenario under distinct filenames.

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