Problem 17-2

Treetop Associated Group (TAG) is seeking financing for acquisition and development of 147 homesites. The land will cost $1.5 million, and TAG estimates direct development costs to be an additional $2.7 million. City Federal Bank will make a loan covering 40 percent of the land acquisition cost, 100 percent of direct improvement cost, and interest carry at 11 percent interest with a 3 percent loan origination fee.

TAG has decided to split the development into two parcel types, standard and deluxe, with the standard parcels comprising 87 of the 147 total homesites. Also, TAG thinks that the deluxe sites will be priced at a $2,000 premium over the standard parcel price of $36,000. Total project revenue will be $5,412,000. After making a 60 percent down payment for the land and incurring closing costs of $50,000, TAG believes that the remaining development costs will be drawn down at $600,000 a month for the first three months and $300,000 a month for the next three months. Parcel sales are expected to begin during the fourth month after closing. TAG estimates that they will sell three standard parcels and four deluxe parcels a month for the remainder of the first year, and five standard parcels and two deluxe parcels per month for the second year.

The company and the bank have agreed to a repayment schedule calling for the loan to be repaid at a rate 20 percent faster than the receipt of sales revenues; that is, the loan plus interest carry per parcel will be repaid when approximately 83.33 percent of all revenues are realized. Other costs to consider include sales expense (paid quarterly at a rate of 5% on parcels sold during the quarter), administrative costs of $7,500 per quarter, and property taxes of $19,000 at the end of each year.

Required:

a. What will be the release price for each type of lot?

b. Estimate the total loan amount including interest carry for TAG.

c. Prepare a schedule and the pattern of loan draws, showing when TAG will have the loan fully repaid and What will be the total cash payments on the project loan?

d1. What will total project costs be?

d2. What percentage of total project costs are being financed?

e. What will be the NPV and IRR of this project if TAGs before-tax required rate of return is 15 percent? (Hint: Prepare a cash flow analysis on a quarterly basis over the life of the project.)