Setting: After Claire had finished her profit estimate for the shopping mall and decided the project was truly a good investment, she was ready to contact her banker, Betsy Benefit, at Best Banking. Claire called Betsy and had a short chat on the phone. Their conversation went like this: Betsy Hello, Claire. I hope we can do business together. We would like to increase our portfolio of construction loans. What can Best Banking do for you? Claire: I hope we can do business. I have this great project called Green Island Shopping Mall and it looks like a real winner. You know Corny Cornell. He has done some estimates for me based on drawings from Pretty Plan Architects. It looks like the whole operation will cost 1,482,700,000 NTD (including loans' fees and interests). We could rent out the floor space for a net income of 650 NTD per square meter month. We stand to make just over 45,000,000 NTD each year. Betsy: That is great. How much equity have you got to put in the project? You know we cannot do it all on debt. Claire: Yes, of course, I know. I have NTD 405,000,000 in the bank right now, and I'm using that to purchase the land for NTD 205,000,000. Betsy: In other words, you can contribute approximately two tenth of the total project cost. It appears we could lend you the other nine tenths. That comes to about 1,072,700,000 NTD. Wonderful. Claire: Betsy Well, this is how it works. We would provide you with a mortgage loan. Once we have reviewed the venture and approved the loan, we can issue a preliminary commitment. We reserve the final commitment for the time you hand us the final plans and specifications. Of course, during the construction period there is no money available from your mortgage loan. Therefore, you will also need funds necessary for construction. Once we give you a preliminary commitment on a mortgage loan it should not be a problem to provide you with a construction loan as well. Claire: So, I will need two loans? Betsy: Yes, one short-term and one long-term loan. Once construction is completed, your mortgage loan will fully pay off your construction loan. In other words, we cancel the construction loan and all your debt will go to long-term loan. However, we can't promise you anything before we have looked at your numbers in detail. Betsy explained in detail all the information required by the investment bank before they could begin work on a mortgage loan. Two days later Claire visited Betsy at the bank and dropped off all the information for the loan application. When Betsy Benefit and Claire Clever met again their conversation went something like this: Betsy: After looking over your expected profits (calculated in Chapter 3) and Corny's construction estimate, I have calculated that you will need a loan of approximately NTD 1,100,000,000 You will have to do a cash flow analysis to find out. We could provide you with a series of 11 draws at NTD 100,000,000 per draw, but it is up to you to find out what months you will need to make those draws in. The interest is 2.50% per month on the total amount of money lent to you by that time. You begin paying interest in the month that you take the draw. For example, in the month you take the third draw, you will pay 2.50% interest on the sum of draws 1, 2, and 3. The interest amount is NOT included in the sum of draws. You can take a draw at any time you want, but your equity must be invested first, therefore the first draw will be after your equity has depleted. Claire: How do I know when I'm going to need each draw? Betsy: The cash flow analysis you perform should provide you with information. This method allows you to keep track of your cash inflows and outflows - so you don't run out of cash! Keep in mind that it is very important to know when you want to make a draw. If you take out too much of the money too early, you will end up paying much more interest than you need to. This also helps me to arrange for the money, because we do not have those sums available at short notice. It also makes it possible for you to determine how much interest you will pay. So, check out the numbers and come back to me when you know in which months you want each draw. It will be a pleasure to do business once I have that information. Claire left the meeting thinking she should have studied that book on project financing she saw in Corny Cornell's office. She went back to Green Island and looked at the list of numbers she had. It told her nothing about when the money would be spent. How could she figure when to make a draw? Clearly, she would have to talk to Corny. Claire picked up the phone and her conversation with Corny went a bit like this: Claire: Hi Corny, the bank is OK with lending me the money, but they want to know when I will be making each draw. That depends on when we will be spending the money, which is, dependent on when a contractor will be doing the work. turn, Corny: That is right. So, we need a very rough construction schedule showing the main work items and when the funds will be spent. I will put this together and fax you a list of the project expenditures and when they will probably occur. The fax, given as a table (see Table 4.1), arrived in Claire's new apartment, which also functioned as her office in Green Island. Now she had the information she needed to determine the timing of the draws and calculate the cost of interest. She also needed to get the numbers right before she made commitments to Tony and Angie for the preparation of final drawings. Table 4.1 - Corny's fax: Rough Project Schedule Plan for payment Item Description Notes during month(s) 1 Land Purchased at month O using equity 2 Planning consultant fee (Bob Builder) 1,2,3 will probably bill you in three equal installments 3 Consultant Fee (Corny Construction) 2,3 we will bill you in two equal installments 4 Architect fee (Tony Tect) 3,4,5,6 will probably bill you in four equal installments 5 Permitting cost (Tony Tect) 6 in last month of Tony's work Months 3,4: 2,925,000 NTD each Months 5,6,7,8: 1,462,500 NTD each 6 Design & cons. engineer fee (Angie Neer) 3-20,23,24 Months 9-20: 568,750 NTD each Months 23, 24: 487,500 NTD each Month 7: 20% of total 7 Grading and site work sub 7,8,9 Months 8,9: 40% each 8 Construction of shopping facility 9-24 Monthly installments of: 46,250,000 NTD 9 Construction of parking lot 22,23 will probably bill you in two equal installments 10 Installation of utilities by sub 10,11 will probably bill you in two equal installments 11 Installation of electrical reticulation by sub 11 one payment 12 Landscaping sub 24 one payment Item Description 1 Land 2 Bob Builder consulting fee 3 Corny Cornell consulting fee 4 Architect fee 5 Permitting cost 6 Design & consulting engineer fee 7 Grading and site work sub 8 Construction of shopping facility 9 Construction of parking lot 10 Installation of utilities by sub Installation of electrical reticulation by 11 sub 12 Landscaping sub 13 Allowance for fees of loans and interests Total Estimated Cost (NTD) $ 205,000,000 $ 6,300,000 $ 4,500,000 $ 25,500,000 $ 15,900,000 $ 19,500,000 $ 80,000,000 $ 740,000,000 $ 110,000,000 $ 40,000,000 $ 6,000,000 $ 20,000,000 $ 210,000,000 $ 1,482,700,000 Prepare a memo for Claire setting out your thoughts on the cash-flow situation. Pay attention to the interest requirements. Summary of the requirements: . . Your equity is 405,000,000 NTD, however you are also using that to buy the land. You have to use all of your equity up before making a draw. Your loan total is 1,100,000,000 NTD, and you can do 11 draws at 100,000,000 NTD per draw. The interest rate is 2.50% per month and payed at the end of the month. The interest amount adds up the more draws you make, however because you are paying it at the end of every month, they don't compound to the total debt amount (the draws you had made). C . i.e. for 3 draws the debt owed would be 300 Million, times the interest rate of 2.5%, resulting in a 7.05 Million payment at the end of the month. You pay interest on all the months after you had drawn the money. You will have some leftover cash from the loan. The memo should include the following: A Cash Flow Analysis prepared per the monthly requirements. [Show your work through a comprehensive spreadsheet of expenditures, interest payments, and inflow draw amounts] A list of the Project Months when Claire will have to make each draw. The total cost of interest due to Claire's withdrawals calculated at each month and in total for the whole project time. . . And a short discussion on: Does the calculated interest amount match with Corny's estimate on allowance? An explanation of why a cash flow analysis is important to the owner and why a bank want a record of this while applying for a loan. Do your findings change your earlier recommendation to Claire about whether the project is a sound investment? . a Setting: After Claire had finished her profit estimate for the shopping mall and decided the project was truly a good investment, she was ready to contact her banker, Betsy Benefit, at Best Banking. Claire called Betsy and had a short chat on the phone. Their conversation went like this: Betsy Hello, Claire. I hope we can do business together. We would like to increase our portfolio of construction loans. What can Best Banking do for you? Claire: I hope we can do business. I have this great project called Green Island Shopping Mall and it looks like a real winner. You know Corny Cornell. He has done some estimates for me based on drawings from Pretty Plan Architects. It looks like the whole operation will cost 1,482,700,000 NTD (including loans' fees and interests). We could rent out the floor space for a net income of 650 NTD per square meter month. We stand to make just over 45,000,000 NTD each year. Betsy: That is great. How much equity have you got to put in the project? You know we cannot do it all on debt. Claire: Yes, of course, I know. I have NTD 405,000,000 in the bank right now, and I'm using that to purchase the land for NTD 205,000,000. Betsy: In other words, you can contribute approximately two tenth of the total project cost. It appears we could lend you the other nine tenths. That comes to about 1,072,700,000 NTD. Wonderful. Claire: Betsy Well, this is how it works. We would provide you with a mortgage loan. Once we have reviewed the venture and approved the loan, we can issue a preliminary commitment. We reserve the final commitment for the time you hand us the final plans and specifications. Of course, during the construction period there is no money available from your mortgage loan. Therefore, you will also need funds necessary for construction. Once we give you a preliminary commitment on a mortgage loan it should not be a problem to provide you with a construction loan as well. Claire: So, I will need two loans? Betsy: Yes, one short-term and one long-term loan. Once construction is completed, your mortgage loan will fully pay off your construction loan. In other words, we cancel the construction loan and all your debt will go to long-term loan. However, we can't promise you anything before we have looked at your numbers in detail. Betsy explained in detail all the information required by the investment bank before they could begin work on a mortgage loan. Two days later Claire visited Betsy at the bank and dropped off all the information for the loan application. When Betsy Benefit and Claire Clever met again their conversation went something like this: Betsy: After looking over your expected profits (calculated in Chapter 3) and Corny's construction estimate, I have calculated that you will need a loan of approximately NTD 1,100,000,000 You will have to do a cash flow analysis to find out. We could provide you with a series of 11 draws at NTD 100,000,000 per draw, but it is up to you to find out what months you will need to make those draws in. The interest is 2.50% per month on the total amount of money lent to you by that time. You begin paying interest in the month that you take the draw. For example, in the month you take the third draw, you will pay 2.50% interest on the sum of draws 1, 2, and 3. The interest amount is NOT included in the sum of draws. You can take a draw at any time you want, but your equity must be invested first, therefore the first draw will be after your equity has depleted. Claire: How do I know when I'm going to need each draw? Betsy: The cash flow analysis you perform should provide you with information. This method allows you to keep track of your cash inflows and outflows - so you don't run out of cash! Keep in mind that it is very important to know when you want to make a draw. If you take out too much of the money too early, you will end up paying much more interest than you need to. This also helps me to arrange for the money, because we do not have those sums available at short notice. It also makes it possible for you to determine how much interest you will pay. So, check out the numbers and come back to me when you know in which months you want each draw. It will be a pleasure to do business once I have that information. Claire left the meeting thinking she should have studied that book on project financing she saw in Corny Cornell's office. She went back to Green Island and looked at the list of numbers she had. It told her nothing about when the money would be spent. How could she figure when to make a draw? Clearly, she would have to talk to Corny. Claire picked up the phone and her conversation with Corny went a bit like this: Claire: Hi Corny, the bank is OK with lending me the money, but they want to know when I will be making each draw. That depends on when we will be spending the money, which is, dependent on when a contractor will be doing the work. turn, Corny: That is right. So, we need a very rough construction schedule showing the main work items and when the funds will be spent. I will put this together and fax you a list of the project expenditures and when they will probably occur. The fax, given as a table (see Table 4.1), arrived in Claire's new apartment, which also functioned as her office in Green Island. Now she had the information she needed to determine the timing of the draws and calculate the cost of interest. She also needed to get the numbers right before she made commitments to Tony and Angie for the preparation of final drawings. Table 4.1 - Corny's fax: Rough Project Schedule Plan for payment Item Description Notes during month(s) 1 Land Purchased at month O using equity 2 Planning consultant fee (Bob Builder) 1,2,3 will probably bill you in three equal installments 3 Consultant Fee (Corny Construction) 2,3 we will bill you in two equal installments 4 Architect fee (Tony Tect) 3,4,5,6 will probably bill you in four equal installments 5 Permitting cost (Tony Tect) 6 in last month of Tony's work Months 3,4: 2,925,000 NTD each Months 5,6,7,8: 1,462,500 NTD each 6 Design & cons. engineer fee (Angie Neer) 3-20,23,24 Months 9-20: 568,750 NTD each Months 23, 24: 487,500 NTD each Month 7: 20% of total 7 Grading and site work sub 7,8,9 Months 8,9: 40% each 8 Construction of shopping facility 9-24 Monthly installments of: 46,250,000 NTD 9 Construction of parking lot 22,23 will probably bill you in two equal installments 10 Installation of utilities by sub 10,11 will probably bill you in two equal installments 11 Installation of electrical reticulation by sub 11 one payment 12 Landscaping sub 24 one payment Item Description 1 Land 2 Bob Builder consulting fee 3 Corny Cornell consulting fee 4 Architect fee 5 Permitting cost 6 Design & consulting engineer fee 7 Grading and site work sub 8 Construction of shopping facility 9 Construction of parking lot 10 Installation of utilities by sub Installation of electrical reticulation by 11 sub 12 Landscaping sub 13 Allowance for fees of loans and interests Total Estimated Cost (NTD) $ 205,000,000 $ 6,300,000 $ 4,500,000 $ 25,500,000 $ 15,900,000 $ 19,500,000 $ 80,000,000 $ 740,000,000 $ 110,000,000 $ 40,000,000 $ 6,000,000 $ 20,000,000 $ 210,000,000 $ 1,482,700,000 Prepare a memo for Claire setting out your thoughts on the cash-flow situation. Pay attention to the interest requirements. Summary of the requirements: . . Your equity is 405,000,000 NTD, however you are also using that to buy the land. You have to use all of your equity up before making a draw. Your loan total is 1,100,000,000 NTD, and you can do 11 draws at 100,000,000 NTD per draw. The interest rate is 2.50% per month and payed at the end of the month. The interest amount adds up the more draws you make, however because you are paying it at the end of every month, they don't compound to the total debt amount (the draws you had made). C . i.e. for 3 draws the debt owed would be 300 Million, times the interest rate of 2.5%, resulting in a 7.05 Million payment at the end of the month. You pay interest on all the months after you had drawn the money. You will have some leftover cash from the loan. The memo should include the following: A Cash Flow Analysis prepared per the monthly requirements. [Show your work through a comprehensive spreadsheet of expenditures, interest payments, and inflow draw amounts] A list of the Project Months when Claire will have to make each draw. The total cost of interest due to Claire's withdrawals calculated at each month and in total for the whole project time. . . And a short discussion on: Does the calculated interest amount match with Corny's estimate on allowance? An explanation of why a cash flow analysis is important to the owner and why a bank want a record of this while applying for a loan. Do your findings change your earlier recommendation to Claire about whether the project is a sound investment? . a