A.CRE

Sources and Uses

A schedule which provides an overview of where capital for a real estate project is sourced from (sources) and how capital is deployed (uses). The sources side includes items such as loan proceeds and investor equity contributions, whilst the uses side includes items such purchase price/construction costs and acquisition costs. Both sides must always balance.

Putting ‘Sources and Uses’ in Context

Introduction

Seaside Development Group, LLC is a real estate developer specializing in luxury coastal residential projects. The company is currently developing a 15-story, 40-unit high-end condominium project called The Azure Residences, located on the beachfront of Fort Lauderdale, Florida. As with any development project, Seaside Development created a “Sources and Uses” schedule to clearly outline how the total project cost would be funded (sources) and where that funding would be allocated (uses).

What is a Sources and Uses Schedule?

A Sources and Uses schedule is a financial summary that details where the project’s capital is coming from (sources) and where it is being spent (uses). This schedule must balance, meaning total sources must equal total uses. For Seaside Development, this schedule was used as part of their discussions with lenders and investors, ensuring transparency and providing a clear picture of the financial structure of the project.

Sources and Uses for The Azure Residences

Sources of Capital

For The Azure Residences, the capital stack included a combination of equity and debt. The breakdown of the sources of capital is as follows:

  • Equity from Seaside Development Group: Seaside Development contributed $10 million in sponsor equity, representing 12.5% of the total project cost.
  • Equity from Outside Investors: An additional $20 million in equity was raised from private equity investors. This amount represents 25% of the total project cost.
  • Senior Construction Loan: A local lender provided a construction loan of $50 million, representing 62.5% of the total project cost. The loan was secured by a first-priority mortgage on the property.

Uses of Capital

On the “uses” side, the total project cost for The Azure Residences amounted to $80 million. The breakdown of how capital was allocated is as follows:

  • Land Acquisition: Seaside Development purchased the 1.5-acre beachfront development site for $20 million.
  • Hard Construction Costs: The cost to construct the 15-story, 40-unit condominium building was $42 million. This included materials, labor, and subcontractor fees.
  • Soft Costs: Indirect costs, such as architectural, engineering, developer fees, permitting, and insurance, amounted to $8.9 million. (See the previous example for a full breakdown of soft costs.)
  • Financing Costs: Loan fees, interest reserves, and lender-required third-party reports totaled $5 million.
  • Contingency: To account for unforeseen expenses, Seaside Development allocated a 5% contingency of $4 million.

Sources and Uses Summary

Sources of Funds

  • Equity from Seaside Development: $10 million
  • Equity from Outside Investors: $20 million
  • Senior Construction Loan: $50 million

Uses of Funds

  • Land Acquisition: $20 million
  • Hard Construction Costs: $42 million
  • Soft Costs: $8.9 million
  • Financing Costs: $5 million
  • Contingency: $4 million

How the Sources and Uses Schedule Balances

The total sources of funds ($80 million) matches the total uses of funds ($80 million). This balance is a requirement of every Sources and Uses schedule. If the sources and uses do not balance, it indicates an error in either the amount of capital raised or the allocation of funds.

Why the Sources and Uses Schedule is Important

The Sources and Uses schedule for The Azure Residences played a key role in securing the $50 million construction loan from the lender. By clearly presenting where funds would be sourced and how they would be used, Seaside Development demonstrated financial discipline and reduced perceived risk for the lender. Additionally, the schedule served as a key document in the developer’s negotiations with outside equity investors, allowing them to see exactly how their funds would be deployed to achieve a return on investment.

Conclusion

The Sources and Uses schedule for The Azure Residences by Seaside Development Group demonstrates the critical role this financial tool plays in organizing and communicating a project’s financial structure. By clearly outlining where the capital comes from and how it will be used, Seaside Development was able to build trust with lenders and equity investors, ensuring the project’s financing was fully secured before development began.

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