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In a real estate project
A firm decided to build 10 buildings which is a small community with a few additional common amenities. They have hired a contractor and have finalized their construction cost for the entire projects. They finalized their sales prices and have sold the entire project. The business model of the project was to put in a small initial investment and then finance the balance of construction payment by sales receivable which are broken down into installments. Now as the financial crises sets in investors are starting to default.
What should the company do and how should it assess its decision
1. Down size the project ( cost is fixed, amenities and infrastructure are common and have been built into the sales price) downsizing will increase the cost
2. Cancel the project
3. How should it estimate the number of people who will default in the future.
4. what sort of risk analysis should the company do.
A firm decided to build 10 buildings which is a small community with a few additional common amenities. They have hired a contractor and have finalized their construction cost for the entire projects. They finalized their sales prices and have sold the entire project. The business model of the project was to put in a small initial investment and then finance the balance of construction payment by sales receivable which are broken down into installments. Now as the financial crises sets in investors are starting to default.
What should the company do and how should it assess its decision
1. Down size the project ( cost is fixed, amenities and infrastructure are common and have been built into the sales price) downsizing will increase the cost
2. Cancel the project
3. How should it estimate the number of people who will default in the future.
4. what sort of risk analysis should the company do.
Replies to This Discussion
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Permalink Reply by siba parasad nayak on -
This BM is a risky one as defaults may occur at any point of time.And company as seller can not ask customers about their financial crdentials.
Well the construction company need not downsize or cancel the project.Its the norm of the trade that 55% to75% of the sale proceeds cover the entire project cost depending upon the area,cost of land ,raw material cost(Varies)as project take 1-1 and a 1/2 years to complete.
My suggetion is 25 to 35 % of the project cost can be taken as Term loan from a bank which can be repaid in 5/6 Qtrly in stalments with a moratorium of 1/1-1/2 year .And tie up arrangements with a banker can be made for customers H/L purpose.bank will scrutinize the financial soundness of the borrower.In this way a bulk of the receivables can be ensured.the Term Loan from bank can be utilsed for the construction purpose not entirely depending upon the receivables.In this way company can ensure maximum flow of cash for the project and can let the bank do the risk analysis of customers.this is a proven strategy.Hope you will find it suitable.Thanks.
Following is my Business model
25% term Loan from a Financial Institute to support construction work.
Tie up for H/L with the same Financial institute or any Bank of your suitability.
Phase wise collection of receivables from customers.
handing over of the property to cutomer with consent of banker.
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