Surviving public contracts with a profit - Mid-Year Review & Forecast Section II

Software provides info key to workouts

Realistic cash flow projections are necessary to reveal the financial implication of the proposed development.

Banks that have foreclosed on troubled real estate projects inherit the problems of those properties. Often, they lack the expertise needed to formulate and implement effective workout strategies. And they are usually unfamiliar with the state-of-the-art tools that can provide them with a clear picture of the financial implications of the project.

To implement a successful workout program that will redirect and maximize the potential of the property, a real estate organization or department must be able to comprehensively and accurately forecast cash flow and utilize the projections to evaluate the project. Moreover, such projections can be the central device for ongoing management and monitoring of the development process.

In the past, many lending institutions did not require comprehensive projections. Now when troubled projects are thrown in their laps, they find themselves without coherent business plans and useful cash flow models.

The need for a clear view of the project is even more pronounced in the case of a troubled property. Here, the issue of resource commitments to continued development of the property must be reexamined by the developer and/or the financial institution supporting the project.

Realistic cash flow projections are necessary to reveal the financial implication of the proposed development. Such projections can provide a means for focusing on key assumptions and for testing the financial results of alternative premises on different approaches to the project.

Rapid advances in computer software technology have facilitated creation of cash flow projections from development over the life of a project. They can render each and every significant development activity crystal clear to anyone viewing such statements. Every important action taken to reposition a property can be represented through the income or expense ramifications associated with that activity.

One barrier to using this technology is that it requires knowledgeable management at a high level that is conversant with the use of software and the project itself. Constructing a sound cash flow model requires that all important workout activities be examined and projected forward, creating the structure of the model to reflect the particular project in sufficient detail to reveal all significant activities. The model permits rapid assessment of changes in key variables and the effect of alternative financing structures. Terms in a given structure can also be tested.

For example, Muscarelle Development recently constructed a cash flow economic model for a 900-unit golf course residential community proposed for development. The model features a summary cash flow projection by month for the seven-year development period and contains 145 line items.

Every step of the project is clearly visible through the numbers, and the figures are supported by subsidiary detailed cost estimates for all construction items and schedules of overhead and marketing expenses.

The model accommodates changes in over 30 variables, such as average sales price for each product type, interest rate, the pattern of construction expenditure on a given housing time over the period of construction, and other factors. Such a model is essential for proper business planning and organization and for effective monitoring of the project.

Given the complexities of workouts and the long range strategies that are required, financial institutions must utilize computer programs that afford them a cash-focused approach to planning, organization and development management. In the coming years, state-of-the-art economic models that evaluate projects within a comprehensive framework will become as accepted as the simplified cash flow analysis methods that have been around for over 20 years.

Michael D. Wilburn Executive Vice President, Jos. L. Muscarelle Development Co.

COPYRIGHT 1991 Hagedorn Publication
COPYRIGHT 2004 Gale Group