How do you change your financial model as your project evolves?

1 Pre-development stage

The pre-development stage is when you identify the opportunity, conduct the feasibility study, and secure the land and the approvals for your project. At this stage, your financial model is based on preliminary data and assumptions, such as the market demand, the site potential, the zoning regulations, and the development costs. You need to use conservative and realistic estimates, and test different scenarios and sensitivities, to evaluate the viability and profitability of your project. You also need to factor in the pre-development expenses, such as due diligence, acquisition, legal, and consulting fees, and how you will finance them.

2 Design and construction stage

The design and construction stage is when you finalize the plans, hire the contractors, and build the project. At this stage, your financial model becomes more detailed and accurate, as you have more information and certainty about the project specifications, the construction budget, the timeline, and the contingencies. You need to update your financial model with the actual costs and revenues, and monitor the progress and performance of your project against the baseline. You also need to account for the construction financing, such as the loan terms, the drawdowns, the interest payments, and the repayment schedule.

3 Lease-up and stabilization stage

The lease-up and stabilization stage is when you market and lease the project, and achieve the target occupancy and income levels. At this stage, your financial model reflects the final outcome and value of your project, as you have the actual rents, vacancies, operating expenses, and cash flows. You need to compare your financial model with the market benchmarks and the appraisal reports, and adjust your assumptions and projections accordingly. You also need to consider the exit strategy, such as the sale price, the cap rate, the taxes, and the net proceeds.

4 Ongoing operation stage

The ongoing operation stage is when you manage and maintain the project, and generate steady income and returns. At this stage, your financial model is used for reporting and forecasting purposes, as you have the historical and current data and trends. You need to update your financial model with the actual operating performance and financial statements, and analyze the variances and ratios. You also need to plan for the future cash flows and returns, such as the rent growth, the capital expenditures, the refinancing options, and the distributions.

5 Renovation or redevelopment stage

The renovation or redevelopment stage is when you upgrade or reposition the project, to increase its value and competitiveness. At this stage, your financial model is used for decision making and evaluation purposes, as you have to assess the feasibility and profitability of the proposed changes. You need to update your financial model with the new costs, revenues, risks, and returns, and compare them with the existing scenario. You also need to secure the financing and the approvals for the renovation or redevelopment, and factor them in your financial model.

Changing your financial model as your project evolves is essential for managing and optimizing your real estate development project. By following these steps, you can ensure that your financial model is accurate, reliable, and useful for your project goals and objectives.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?