Financing For Sale Property

2. Lee Waters of Oilers Development Co. has found a site that it believes will support 75 home sites. The company also believes that the land can be purchased for $12,000,000 while direct development costs will run an additional $12,000,000. The Bitumen Capital Partnerswill underwrite 42% of the purchase price of the land plus 100percentofthe improvementsplustheinterestcarry.Theloanwouldbemadeat12% interest with a 3 percent loan origination fee.

Lee believes that the development will sell faster with three types of parcels: Cluster, Standard and Creekside. The total number of parcels in the subdivision would be 180 comprised of 54 Cluster (rowhouse), 90 Standard (single family) and 36 Creekside (sf beside an environmental zone) parcels. Oilers marketing staff believes that the pricing is as follows: Cluster at $100,000, Standard at $200,000 and Creekside at $250,000. These lots would be sold to at least four different homebuilders with whom Oilers have an existing relationship. The commission (sales expense) paid on sales is 5% and is paid quarterly.

Lee estimates that there will be six direct cost draws following the initial draw for the land purchase. The draw for the land purchase would occur at t=0 and would be for 42% of the $12,000,000 land price. Following that, at t=1, there would be a draw of $3,000,000 followed by another identical draw at t=2 then followed by four monthly draws of $1,500,000 totalling $12,000,000 in direct costs over six months. Again, the draw for the land purchase would occur at t=0 and would be for 42% of the $12,000,000 land price. Other up-front fees include closing costs of $150,000 and a 3 percent loan fee. These additional upfront costs are not covered by the loan.

Oilerssales staff supervisor assures him that she can generate the following monthly sales activity starting in the fourth month:

Months Cluster Standard Creekside

4-6. 2 2

7-12 4 3 1

13-18 3 6 3

19-24 1 5 2

Bitumen want their money out of the project early and want Oilers to agree to a release price per parcel that will result in the loan being repaid at a rate 25 percent faster than sales revenue is expected to be earned. Other costs to consider include sales expense (paid quarterly on 5 percent of the sales price of parcels sold during the quarter). Annual administrative costs are $150,000 paid quarterly and annual property taxes are $300,000 paid semi-annually. None of these latter items are to be funded by the loan.

Use the Grayson model to develop a total monthly sales schedule for Oilers.

a. How many months will it take Oilers to fully repay the loan? In what month is the balance = 0?

b.What will be the total interest carry funded in the loan amount? c. What will be there lease price for a Creekside lot? d. What is the maximum outstanding loan amount?

e. What will Lee's total equity requirement be? f. Should Lee undertake this project if its required return on equity (equityIRR) is 20 percent?(Hint:Doa cashflow analysis on a quarterly basis for the life of the project.)

You can use the Grayson model.