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ASSIGNMENT
NICMAR/CODE OFFICE


1. Course No. - IDM 12
2. Course Title - Construction Finance Management
3. Assignment No. - 1
4. Date of Dispatch - 1
st
March, 2014
5. Last date of receipt - 5
th
March, 2014
of assignment at CODE office













Submitted By:
Nihar Reddy J
PGP IDM
213-10-32-11824-2154

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Index

1. Scope of Work 3
2. Understanding project and project requirement 3
3. Developers perspective 3
4. Alternatives for method of financing 4
5. Calculating capital requirement 4
6. Profit 5
7. Proposed project financing 5
8. Summarizing 5
9. Bibliography 6






















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1. Scope of Work:
An offer has been given by a Charitable Trust to develop and build a facility on a 10,000m
2

of plot in a prime locality of Pune, where 5,000m
2
of area will be used by the trust for
housing, health facilities for senior citizens. 5,000m
2
will be given free to the developers as a
cost of development cost of Land is Rs. 10,000/- per m
2
.
Specifications for flooring:
-10% Granite
-40% Kota stone
-50% Mosaic cement tiles
Developers would like to have a minimum of 18% net profit on their investment and
developer can invest only Rs. 10 lakhs as his own funds and can raise not more than Rs. 50
lakhs as bank loan since the property value is 50 lakhs.
2. Understanding project and project requirement
The trust wants to build a facility for public welfare. Due to probable lack of resources the
trust is willing to pay the developer in kind i.e. through giving 50% of total land
By making a preliminary survey of land prices of prime locations, it is estimated that the cost
of Rs 8,000/- per sq m to Rs 12,000/- per sq m is prevalent. Therefore the given Rs 10,000/-
per sq m rate be safely taken to calculate the land price. Thus 10,000 sq m of land will be of
Rs 10 crore worth. Therefore in principle the trust is paying Rs 5 crore in kind to the
developer as development cost.
The objective for this complex:
To utilize the space provided by charitable trust for a social & noble cause.
To provide a better place for senior citizens with lush green arena.
To make the society aware about the responsibly towards our elders
With the said objective and given A Class construction the 5 crore worth of construction
would be around 5000 sq m of built area. Thus the charitable trust will get what they need
through this arrangement
3. Developers perspective
This offer gives the developer an opportunity to make profit from the parcel of land given to
him by the trust. The challenge here is to generate capital and cash flow during the
construction period, in which there will be no revenue generation.
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Since the present capacity is restricted to Rs 60,00,000/-, the developer has to look into other
sources to finance the project
4. Alternatives for Method of financing
The developer will have to build either housing or a commercial healthcare facility on his
parcel of land which can be then sold at a profit. It is assumed here that both housing and
healthcare are the approved land-use since the charitable trust is making these facilities on the
same parcel of land
Of the two, housing is more preferable as these can be marketed before the construction starts
and sold before the start of project, during the construction phase and at the completion of
project. Hence this method will generate cash flow during all stages of the project
However for making a healthcare facility developer will have to find a financer or go into an
alliance with established healthcare leaders in the industry which will finance the project. It is
both difficult to find such a financer and it will also reduce profit margin as the developer
will be acting as a builder for two clients
Requirements of funds for the housing developed for commercial purpose by the developer
will depend on the amount of permissible FAR (floor area ratio) for such purpose
By looking again at the proposal of the trust, a preliminary estimate can be made for
calculating the area of housing. It is as follows
Total project cost of 5 crore can be split into 3.5crore for housing for the aged and 1.5 crore
for the healthcare facility
Since the housing is a multi level development and health care will be limited to 2 -3 floors
we can estimate that housing and healthcare uses an equal amount of site area, i.e.
2500 sq m of area is used in healthcare which costs 1.5 crore and
2500 sq m of area is used in housing which costs 3.5 crore.
Thus if we require to make housing on 5000 sq m of land, it will cost Rs 7.2 crore (this we
assume includes the marketing cost for the project)
5. Calculating capital requirement
For trusts requirement: Rs 5 crore profit of 10 % i.e. 4.5 crore
Development: Rs 7.2 crore profit of 10 % i.e. 6.48 crore
Total capital requirement
10.98 Crore. (This is Net Present Value)
The capital requirement would be as follows
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1st year 2.3 Crore approx
2nd year 6 crore approx (which will be 6.65 crore based on current inflation of 10.92%)
3rd year 2.68 crore approx (which will be 2.97 crore based on current inflation of 10.92%)
Therefore at the end of 3 years total of 11.92 crore would have been spent
On this the developer wants to make a profit of 18% on his investment
6. Profit
Typical project of this nature would need 3 years to get finished. At the end of 3 years total of
11.92 crore would have been spent. The profit on this amount would be 2.145 crores.
This profit will be generated from the sales of the housing units and will be generated
continually throughout the 3 years
7. Proposed project financing
The developer has Rs 10 lakhs to invest and can take a loan from bank for Rs 50 lakhs.
Therefore, based on our initial estimate of capital requirement for the first year, this is nearly
30 % of total capital needed for one year.
Also the sale of the proposed housing can be done through CLP (construction Linked plans)
but that revenue generation will only happen after some period of time, especially after the
first quarter. Therefore the developer will have to look for some other source of long range
debt capital
This he can raise through the mortgage of the land given by trust to him. Since the value of
the land is 5 crore, he can easily have a loan against property for around 50-60% of property
value. i.e 3 crore
8. Summarizing
Year 1:
Total capital available = 3.6 crore
Source of capital:
1. 3 crore long term capital
2. 50L short term capital (needed for the first quarter).
3. 10L his own investment (needed immediately for starting of work).
Total requirement for expenditure = 2.3 crore
Requirement of revenue from sales = 0.0
Surplus 1.3 crore will have to be invested in short term investments
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Year 2:
Total capital available = 1.3 crore
Source of capital:
1. 1.3 crore surplus from the 3 crore long term capital loan
2. From booking/sales of housing units
Total requirement for expenditure = 6.65 crore
Payback of loan from bank and personal investment = 0.672 crore
Minimum Requirement of revenue from sales = 7.322 crore
Surplus will have to be invested in short term investments and used to pay back the short
term loan raised from bank worth Rs 50L. The payback in this year would be 56L. Also
developers own capital investment will be paid back, which will amount to 11.2 L
Year 3:
Total capital available = 0.0
Source of capital
1. From booking/sales of housing units
2. Total requirement for expenditure = 2.97 crore
3. Payback of loan taken against property = 3.36 crore
Minimum Requirement of revenue from sales = 6.33 crore
This is the minimum revenue that will provide the breakeven for the project.
Remainder of 2.145 crores can be generated after this period.
9. Bibliography:
Inflation in India Wikipedia
Construction Finance Management NICMAR edition
Blogs on Internet with topics related to Construction Finance Management.