5/6/2020 Real Estate Development Model - Overview, Guide, and Steps

What is a Real Estate Development Model?

A real estate development model usually consists of two sections: Deal Summary and Cash
Flow Model.  Within the Deal Summary, all important assumptions – including the schedule
(which lays out the timeline), property stats, development costs, nancing assumptions, and
sales assumptions – are listed and used to calculate the economics and pro tability of the
project.

The Cash Flow Model begins with the revenue build up, monthly expenses, nancing, and
nally levered free cash ows, NPV (net present value), and IRR (internal rate of return) of
the project. In the following sections, we will go through the key steps to building a well-
organized real estate development model.

Deal Summary
 

1. Schedule and Property Stats

The rst step in building a real estate development model is to ll in the assumptions for
schedule and property stats.  Here is a list of items which should be included:

2. Development Costs

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For the next step in creating a real estate development model, we will input the
assumptions for development costs in terms of the total amount, cost per unit, and cost per
square foot.  Development costs might include land cost, building costs, servicing, hard and
soft contingency, marketing, etc. Using the property stats lled in earlier, we can calculate all
these numbers and complete the development costs section. The section should look
something like this:

Image Source: CFI’s Real Estate Financial Modeling Course.

3. Sales Assumptions
In sales assumptions, we will calculate the total revenue from this project. Suppose market
research is done and based on comparables, we believe that $500 per square foot is a
realistic starting point for the sales price. We will then use this as the driver for revenue.
After calculating sales (total, $/unit, $/SF), sales commissions (e.g., 50%), and warranty, we
can gure out the net proceeds from this project.

4. Financing Assumptions

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For nancing, there are three critical assumptions:  loan to cost percentage, interest rate,
and land loan.

Before calculating the total loan amount, we need to gure out the total development cost
amount. Since we have not yet calculated the interest expense, we can link the cell to the
cash ow model for now and obtain the value once the cash ow model is lled in. The
commissions are the same as the sales commissions in the sales assumptions section. The
total development costs can be calculated as:

Total Development Cost = Land Cost + Development Cost + Sum of Interest and
Commissions

Now we can ll in the rest of the nancing assumptions.

The Max Loan Amount obtained for this project = Total Development Cost x Loan to
Cost Percentage
Equity amount = Total Development Cost – Max Loan Amount

 
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5/6/2020 Real Estate Development Model - Overview, Guide, and Steps

Image Source: CFI’s Real Estate Development Model Course.

The gures above will be the assumptions from the Deal Summary section. Once we
complete the Cash Flow Model, we will come back and complete the Development Pro
Forma section and add sensitivity analysis.

Cash Flow Model

 

1. Revenue Build Up
The rst step in calculating revenues is to nd out the townhome absorption and closings. 
Absorption is the number of available homes being sold during a given time period, while
closings are the number of homes closed once the construction is complete.

Now we can build up the revenue using the absorption and closings information.

Townhomes sales = Sales Price/Unit x  Townhome Closings

First 50% Commissions (charged when homes are sold) = – Townhome absorption x
 Sales Price/Unit  x  (Commission% /2)
Second 50% Commissions (charged when homes are closed) = – Townhome closings x
 Sales Price/Unit  x  (Commission% /2)
Warranty = – Warranty cost/Unit x  Townhome closings
Total Net Revenue = SUM(Townhome sales + 50% Commissions + 50% Commissions +
Warranty)

(*Note that commissions and warranty are in negative amounts.)

2. Expenses
Now we’ll nd out the development expenses, which include land acquisition cost, pre-
construction spending, and construction spending. The numbers can be found in the
development costs assumption section from the Deal Summary.

Land Acquisition Cost = Land cost

Pre-construction spending = Pre-construction spend ($/month)
Construction spending = (Development costs – Pre-construction spending)/No. of
months of construction
Total Development Costs = SUM(Land acquisition cost + Pre-construction spending +
Construction spending)

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5/6/2020 Real Estate Development Model - Overview, Guide, and Steps

3. Costs to Fund and Proceeds to Repay Capital

The Cost to Fund is the shortfall in the project cash ow that needs to be nanced. When
the total net revenue is less than the total development costs, there is a negative cash ow
that we need to cover. When total net revenue becomes greater than the total development
costs, then there will be positive proceeds that we can use to pay back borrowed capital. We
can use the following formulas to calculate the two numbers:

Costs to Fund = IF((Total Net Revenue – Total Development Costs) > 0, (Total Net
Revenue – Total Development Costs), 0)
Proceeds to Repay Capital = IF((Total Net Revenue – Total Development Costs) < 0,
(Total Net Revenue – Total Development Costs), 0)

4. Financing
Next, we calculate the loan balances, draws, repayments, and interest accrued. The table
below summarizes the calculations for the rst period and the following periods:

We should also perform a quick sanity check to ensure none of the ending balances exceeds
the max loan amount.

5. Free Cash Flow and IRR

We can now calculate the levered free cash ows and resulting IRR of this project.

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Levered Free Cash Flow = SUM(Costs to Fund, Proceeds to Payback Capital, Loan
Draws, Loan Repayments)

Equity Balance is simply the cumulative FCF:

The rst-period balance = Levered Free Cash Flow

Following period balances = Previous Balance – Levered Free Cash Flow

Finally using the XIRR formula, we can calculate the Levered IRR for this project:

Levered IRR =XIRR(All Levered Free Cash Flows, Corresponding Time Period)

Image Source: CFI’s Real Estate Financial Modeling Course.

More Resources
CFI is the o cial provider of the Financial Modeling and Valuation Analyst (FMVA)™
certi cation program, designed to transform anyone into a world-class nancial analyst. To
keep learning and developing your knowledge of nancial analysis, we highly recommend
the additional CFI resources below:

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5/6/2020 Real Estate Development Model - Overview, Guide, and Steps

Financial Modeling Best Practices

Foundations of Real Estate Financial Modeling
Real Estate Joint Venture
Types of Financial Models

Financial Modeling Certi cation

Become a certi ed Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s

online nancial modeling classes!

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