Mastering Development Business Plans
Mastering Development Business Plans
Essential Strategies for Investors and Asset Managers
Dear all,
This week the Newsletter offers a deep dive into the building blocks needed to master Real Estate Development Business Plans.
As usual I hope you will find it valuable.
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In today's competitive real estate market, a well-structured business plan is the foundation of any successful development project. A comprehensive plan not only guides the development process but also reassures investors and stakeholders of the project's viability.
In this newsletter, we'll break down key strategies for mastering development business plans, focusing on basic components that are foundational to develop a competent business plan.
"A property development business plan is a working document which evolves as your thought process progresses, and you clarify each aspect of the project." — Archistar
These are the key topics:
Defining your Project Vision and Development Strategy
Managing Development Costs
Revenues
Creating a Realistic Project Timeline
Financials
Now let’s dive in.
1. Defining Your Project Vision and Development Strategy
A Development Business Plan should clearly outline the project's vision and strategy. This is important because it provides the framework for executing the project successfully.
Project Vision
Establishing a project vision that goes beyond maximizing profits is essential. What value will the project provide, and what legacy will it leave?
Below are a few considerations that will help develop a good vision:
Will the Development aim to attract talent?
What are the decarbonisation goals of the project?
Will sustainability be a driving factor?
Will it appeal to a specific target market?
How will it enhance value?
Will it be a New Build or Refurbishment?
What kind of social impact will be achieved?
Strategising Your Development Approach
A clear development strategy is crucial for managing timelines, resources, and stakeholder expectations. Successful development depends on aligning strategic goals with market demand, optimizing space usage, and creating a resilient structure adaptable to future trends.
Establishing a development strategy requires a deep understanding of the assets or land. Furthermore, it necessitates analyzing the broader and local context surrounding the property. This analysis makes it easier to identify problems, opportunities, and potential solutions.
When expanding and finalizing the strategy, consider the following:
Is it a redevelopment of existing assets or ground up development?
How will the project be phased in response to market demand?
How will the leasing strategy influence the development?
Will the project require a Planning Approval or multiple Approvals?
How will the Design & Construction Timeline impact the Leasing strategy?
What is the Highest and Best Use for the land?
2. Managing Development Costs
Development costs are a key factor that profoundly impacts the financial case of a development project. Construction costs, in particular, are highly affected by inflationary trends, a situation evident since COVID-19.
It is critical that the cost budget comprehensively covers key areas and that values are backed by evidence. Clearly, there is a judgment call involved, and a decision must be made to maintain commercial viability.
Below is a general list of key development costs to include in a budget:
Soft Costs
Design Fees (Pre and Post Planning)
Leasing Fees
Marketing Fees
Legal Fees
Finance Fees
Peer Reviews
Statutory Fees
Development Management
Project Management
Hard Costs
Demolition Costs (If relevant)
Infrastructure Costs
Construction Costs
Interior Fit-out Costs (depending on Asset Class)
Contingencies
Development Contingency or Construction Contingency + Soft Cost Contingency
Contingencies are crucial at this stage. It’s essential to ensure that inflation and market risks are accounted for in the budget.
3. Maximizing Net Operating Income
While costs are critical, correctly estimating revenues is crucial to show how much value the asset can generate. It's important to provide justifiable assumptions and ensure all possible revenue sources are accounted for.
Revenues should be identified for each use or asset class within the project. Ensure all values come from trusted sources and are backed by market analysis. Generally, this information should come from external sources such as professional advisors.
For a development and hold scenario, operational allowances should also be included: service charges, asset management, and maintenance capex.
4. Creating a Realistic Project Timeline
The project timeline is important for building development cash flow. The timeline should outline durations for the design, construction, and leasing phases.
At an early stage, a timeline can be estimated based on previous experience and benchmarking similar projects. Developing a detailed timeline can significantly influence the overall development strategy.
The primary goal is to finish as quickly as possible. However, time-to-market must be balanced against market demand and the absorption rate for the product.
Below are the key timeline phases that are needed to extract key data from:
Pre-Planning Phase → cash used to pay design teams
Post-Planning Phase → cash used to pay design teams
Construction Phase → cash used to pay for construction activities
Lease Up Phase → revenues will start coming in during this period + operational expenditures
In conclusion, it’s essential to have a clearly defined timeline assumption in place. This helps in refining the development strategy and building a more accurate financial model.
5. Building a Strong Financial Case
At the core of the business plan is a solid financial case. If the numbers don’t add up, the project won’t be commercially viable and won’t interest any investors.
The project requires a robust financial model that projects key financial metrics: net operating income, cash flow, return on investment, internal rate of return (IRR), and margin on cost (MOC).
This model must be well-structured and accurately reflect all the assumptions outlined in the sections above:
Development Costs.
Revenues.
Financing Assumptions.
Development Criteria (Building Area, Building Uses).
Development Timeline.
All of these inputs will feed into a Discounted Cash Flow (DCF) analysis that models the outflows and inflows of cash for the project dynamically. The timeline for the DCF typically starts when the property is purchased and ends when the asset is stabilized (or fully leased).
If the development operation involves other investors, a waterfall structure will also be included to provide a clear picture of the return on investment for investors.
The return on investment will be assessed using metrics such as:
Internal Rate of Return (IRR)
Net Present Value (NPV)
Margin / Profit on Cost (MOC/POC)
When dealing with operations heavily regulated by third-party regulatory bodies, the financial case will be presented in the form of financial statements, including a cash flow statement, profit and loss statement, and balance sheet.
Conclusion
Mastering a development business plan requires a deep understanding of not only financial and operational factors but also sustainability and safety concerns. By adopting a strategic, forward-thinking approach, developers can ensure that their projects are not only profitable but also responsible and resilient for the future.
Here are the key takeaways to help you master development business plans:
Clearly define your project vision to guide your development strategy.
Manage development costs by understanding soft and hard costs and planning for contingencies.
Accurately estimate revenues to maximize net operating income.
Create a realistic project timeline to ensure timely completion and financial accuracy.
Build a strong financial case to demonstrate project viability to investors.
Incorporate sustainability and social impact to enhance project value and legacy.
That’s all for today.
See you next week.
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