REAL ESTATE BUSINESS PLAN (REBP) (Encyclopedia)
The real estate business plan is a good tool that allows to make an assessment of a building project through a systematic and organic presentation where all elements are detailed. The purpose of this plan lies in its ability to reach a defined project planning, thus allowing to highlight and analyse in a critical perspective all its critical points and strengths. The subject of a REBP can be an investment in a single building or multiple buildings, the income or the development / renovation and subsequent sale of a property. An analysis of a business plan, or rather a comparison between two or more projects of property investment, can go through a rapid screening by a comparison focused on the contents, characteristics and expectations of future projects. The real estate business plan can be used to launch a new initiative, as a document to substantiate a claim for credit for a transaction to buy or sell one or more real estate items or even as a tool to monitor the progress of a project already started. Following the recent renewed interest in the property sector that saw a boom in 2001 and which has suffered the financial crisis since August 2007, REBPs have increasingly become an essential tool in transactions submitting credit applications to financial institutions. Banks have indeed taken their point of view by favouring the ability to generate revenue streams and constant positive growth as compared with the logic of a guarantee based on the tangible good that is financed.
Even if among the different business plans currently produced it is not possible to identify some uniformity of procedures in drafting a structured and pre-index paper, it is easy to define some macro-areas which should be articulated in a business plan to ensure its completeness and efficiency in reaching its ultimate goal.
A business plan must therefore cover the following areas: 1. Executive summary; 2. Property description; 3. Market analysis; 4. Project Development; 5. Investment Estimate; 6. Management and Organization; 7. Financial business plan.
The Executive Summary must include a concise synthesis to propose a quick understanding of the proposal in order to attract attention and arise immediate interest for other sections of the BP through a short yet comprehensive version of the project. In this context, the executive summary should not include information from other sections but should prove to be only a synopsis of the BP.
Under the second point (Description of the real estate property), the characteristics and technical specifications of the project are to be represented, such as the description of the location, description of the current state of the buildings, development plans drawn up, the plan dictated by regulators, any existing explicitation of different bindings (architectural, urban planning, legal, etc.).
Under the third point (Market Analysis), the basis of the development plan for the property is articulated. This section includes the macro-economic characteristics of the place where the project is developed through a detailed analysis of the conditions of the specific context and of the development plans that are also in adjacent areas. This section also shows a detailed analysis of current and past values of similar real properties to provide a comprehensive understanding of the market in question, more representative as larger volumes are examined. In this section, also the condition of the financial market should be reviewed, the reference being that only in areas with a developed financial market it will then be possible to generate income to the building plan.
The fourth point (Development Project) usually tends to spell out the reasons which led to the development of the proposal, the structure of its evolution over time and its expected uses. In such a context it is also important to report the possible consequences that might result from difficulties in financial terms … the so-called risks related to problems of bureaucracy, increased raw materials cost, labour, etc. that, by making more uncertain the success of the project within a specified time, could result in delays in the execution and a serious impact on the cost-effectiveness of the entire operation. Hence, the risks must be analysed and reported through a structured plan that includes their effective and efficient management.
The fifth point (Investment estimate) must include a proactive analysis of the feasibility of the project that cannot ignore an estimate of the costs for its implementation. An estimate that must be, as explained in the previous section, likely to consider a variable percentage of the risks depending on the level of detail of the project.
Under point six (Organization and Management), the management of the project is described in detail. It is now common practice to envisage the creation of a special company (SPV) that is established with the specific purpose of implementing the project. The characteristics of the new company, its financial structure, organisational structure, and the maturity of its management are reported in this context.
The seventh point (Economic/Financial Plan) will provide a quantitative representation of the project, by highlighting in particular its expected performance. The Economic and Financial Plan is made up of the income balance sheet and of the Assets/Liabilities statement, as well as of the cash flow perspective and the perspective of performance indicators. In particular, what is important is the definition of the timeframe projection with a clear indication of the project completion date. Among the assumptions are those that indicate general forecasts on inflation, on taxation applied by the country, on evolution of the exchange rate of the currency if the project is located in a country with a currency different from that of reference, and on the average cost of personnel management and of the project organisation. A plan of investment and the definition and estimation of costs and expected revenues are also reported in this context. Crucial to any REBP is also the "sensitivity analysis" that covers the variation in critical factors, such as the vacancy rate, the interest rates, the economic situation, etc., which may change the results of the project and more generally its sustainability over time. All of the above contribute to creating a realistic and credible business plan to provide a broader analysis and a clearer understanding of the interrelationships between the variables considered and any subsequent action. The most frequently used performance indicators are: Net Present Value (NPV), Internal Rate of Return (IRR), ROE (Return on Equity), ROI (Return on Investment), the financial autonomy index (long-term debt / equity) and the debt ratio.
Linneman P. (2004), "Real Estate finance and investments: risks and opportunities". Philadelphia.
Tronconi O., A. Ciaramella, B. Pisani (2007). "La gestione di edifici e patrimoni immobiliari". Milano. Il sole 24 ore.
AA.VV. (2007). "Società di investimento immobiliare quotate". Milano. Il sole 24 ore.
Editor: Alberto Maria SORRENTINO
© 2009 ASSONEBB