The purpose of this post is to explain how to use the Development Budget in CREModels development models. This post will address how to properly build out a development budget by utilizing its various features, such as the flexible timing elements.
All development models break down the Development Budget into multiple subsections. Each model will have “Land and Related Costs”, “Hard Costs”, and “Soft Costs”. Other subsections that you may find in your model include “Other Development Costs” and “Financing Costs/Contingencies”. Each of these subsections work exactly the same from one to another with the exception of contingencies (as explained later).
The user can enter the amount of their development costs in multiple ways. Each subsection will have two columns labeled “$ Amount” and “Type” which will determine the amount used for each cost. The “Type” column will be a dropdown in which the user can select what they want to base their cost on. Standard dropdown types across all development models include “Total ”, “ Unit”, and “$ SF”. Each model will also have additional unique dropdown options specific to that model type. Once the “Type” has been selected, the user will then enter the corresponding amount in the “$ Amount” column. No matter what combination the user selects, the model will calculate and show the “Total Amount” of that cost.
The development models allow the user to control the timing of each cost independent of one another. The timing is controlled by the “Start Month” and “Duration” columns. The “Start Month” will be the first month in which the corresponding cost will begin to accrue, while the “Duration” will be how many months the expense will accrue for. The “End Month” column will inform the user the final month in which each cost will accrue based on their inputs in the previous two columns.
The user can choose to spread the development costs in one of two ways, either by an equal spread or an S-Curve. This can be controlled from the “Spend Curve” column which will act as a dropdown for the user to choose which of the two options to use. When using the “Equal” option, the cost is spread evenly over its duration. For example, if a cost is ($1,000,000) with a duration of (10) months, ($100,000) will be spent each month for that cost.
Using the “S-Curve” option will cause the cost to spend a lower amount in the early months. It will then steadily ramp up to a peak amount through the duration before eventually trickling down at the tail end, much like a bell curve distribution. A CREModels analyst can modify this for you if you have specific construction curves you would like built in.
Contingencies are usually found at the bottom of the Development Budget with the “Financing Costs” and are a bit different from other development costs in that they are usually a percentage of another cost. For example, Hard Cost Contingency will be a percentage of total Hard Costs. The user only needs to enter the percentage amount, the timing, and select the “Spend Curve”. Some contingencies or “Fees” have a dropdown in the “Type” column that allows the user to select which other costs the contingency should be based on. Not all contingencies and fees appear in every development model. As mentioned above a CREModels analyst can modify this for you if you have specific nuances you would like built in
Operating Deficit is calculated automatically and is the amount that is required to cover any operating shortfall while the property is approaching stabilization. The timing of this cost corresponds with the months that a shortfall exists. In some cases, this may cause the development to appear longer than what is entered by the user. This can often be a clue that you are leasing up too slowly or your operating budget is not finalized.
Interest Reserve is the amount of interest that will accrue on the Construction Loan before the property has generated enough revenue to service it. Like the Operating Deficit, Interest Reserve is automatically calculated and timed out according to the months which interest must be covered.
See The CRE Suite: Understanding the Construction for more information on construction loan interest.
Another key feature of the development models is the ability for the user to input actual development cost data once the project begins. The “Actuals” can be found to the right of the development cost inputs. First, the user must enter how many months of actuals they wish to enter. Doing so will unhide a number of columns equal to the number entered. From there, the user can enter the actual cost incurred for that expense each month.
When entering “Actual” data, the remaining balance of that cost will be spread over the remaining duration of that cost. The monthly amounts previously calculated by the model may adjust to reflect the changes from the “Actuals” (see images below for example).
Notice how the monthly amounts after the first three months of actuals increased. This is because the model is adjusting for the fact that only ($37,500) have been incurred when ($250,000) was scheduled to have been incurred in the same time span.
The benefit of this is that it shows the user that they may be behind schedule on their development and that they either need to pick up development or adjust their forecast.