by Sebastian Muscolino - SPS Group
Why Yours Work and Your Financiers Don't
Feasos are funny things, sometimes developers prepare them to justify their rationale after
acquiring or deciding to proceed with a development, and other times they are used for the reason intended.
For most developers, the feaso has been used to take an average opportunity and make it appear better,
whereas for others (the more pragmatic) they are the only way to truly determine whether or not a development
is financially viable.
Every good feaso has a high level of is a science behind all its key assumptions - both costs and revenues.
Don't get me wrong, 'gut feel' plays a role in this process, but try explaining this to your financier.
The feaso needs to be conservative and founded on reality.
The best feasos are the ones that not only list out all the cost centres and revenues of a project but also
specifically highlight how much debt and equity is required. Basically this means your feaso also services as a
Funding Table - highlighting at the outset, the need for cash. Of course the likely Total Development Cost (TDC)
and Revenues are the cornerstone, but so too is knowing how much cash you'll need may be even more important -
this is where the financier comes in.
The Financier's Perspective
Let's be honest, if your lender won't fund your project, you most probably won't be able to proceed. Even if you're
luckily enough and have deep pockets, utilising leverage to enhance your return should be considered. Assuming you hit
your required internal profit hurdles, understanding how your lender views the project and its cash flow is just as important.
Lenders will, almost always lend on a cost-to-complete basis meaning you'll need to have access to the required
capital / equity BEFORE the financier tips in its funds. Easy, right? well actually the definition of 'cost' is
mostly where this ideal breaks down. You see your definition of TDC will almost always be different to your
financiers which will vary from one to the other.
COST - So what is it?
Usually a financier sees a 'Cost' a 'Hard Cost' whereas on the other hand, the developer sees a cost as anything it gets
an invoice for and has to pay when it falls due - of course, this makes sense.
When the financier says, 'we will lend you 75% of the Cost', they actually mean lending you against something that they
can generally touch and feel - typically land and construction works. So thinking this through, if the financier doesn't
deem your consultant fees, your land entry costs (stamp duty and legals, etc), or sales and marketing costs, as bona fide
'Costs', and they lend on a cost-to-compete basis, then what you require to be funded and what you will be offered will
two (2) different things. More often than not, the net result is you'll be left short!
Keep in mind, your equity piece may be scrutinised if it's deemed merely a recent uplift in land valuation as
financier's typically like to see 'hurt money' in deals they fund.
If you don't think like a financier, there are some other rude shocks that you'll likely encounter - failing
to include a Contingency Allowance, over-optimistic Revenue / Sales Targets, unrealistic sales absorption / take-up
rates and incorrectly calculating Capitalised Interest.
The Contingency Allowance
Whether or not you have analysed your project to the endth degree - obtained quotes, locked in fixed prices, etc,
you need a cost contingency of around five percent of the budgeted construction cost. Excluding this line-item
from your feaso can result in an overstated development straight-line margin (on TDC) of around 2-3%.
Dealing with it
The only way to deal with this situation is to apply a rigorous, pragmatic and honest approach and process when
preparing your feasibility study. It must always incorporate a Funding Table - outlining those costs to be funded
by senior and sub-ordinated debt, and the balance, those funded by you - as developer's equity. This process will,
as it should, expose any funding shortfall before acquisition or Constuctions commencement. Remember you will always
need to contribute your funds before the financier tips in.
The best feasos always aim to fast-forward the project on paper so as to anticipate all costs, risks and
expected revenues - from project concept-to-completion.