As promised, I’ve recorded a tutorial on how to use my construction draw and interest calculation model. The 20 minute tutorial walks you through how to use the model to forecast construction cash flows during your development period. The model calculates construction loan interest, forecasts the distribution of sources and uses throughout construction, projects an equity and debt draw schedule, and visualizes the outcomes in two column graphs and a pie chart.
Note: Since recording this tutorial, I’ve updated the model several times. The latest version includes features that differ from the version used in the tutorial. While the tutorial is still largely applicable, note below the important differences between the version used in the video and the most recent version of the model.
A Few Things to Keep In Mind about this Model
Because I chose not to use iterative calculation when figuring loan interest, in this tutorial I show you instead how to use Goal Seek with the model to size your construction loan. The Goal Seek method allows you to properly calculate the total equity and debt required; which in turn calculates an interest reserve for the construction period.
While this method is not fully dynamic, I believe it is preferable to dealing with a circular reference when calculating construction interest.
Also important to note, the model only calculates development period cash flows. It does not model operating cash flows or partnership-level cash flows. With that said, the model can easily be integrated with your DCF and waterfall to create a pretty comprehensive development model.
Important Changes to the Model Since Recording this Tutorial
While the core aspects of the model have largely stayed the same, you’ll notice some key differences between the version of the model used in the video below, and the version you’ve likely downloaded. Here are a few things to keep your eye out for:
- Most importantly, since recording this video I’ve gone away from the “Length” input on the Budget tab and instead have gone to 1st month and last month inputs. In other words, rather than entering the first month that a budget item begins to fund, followed by the length (in months) that the budget item will fund, instead the user enters the first month that a budget item begins to fund and the last month the budget item funds. The Length is then automatically calculated. This makes modeling your construction draw much easier.
- You’ll now find the sources and uses cash flows detailed out on the Sources and Uses tab, immediately to the right of the graphs.
- I’ve since added a Gantt chart tab, where the construction schedule is dynamically (i.e. automatically) visualized
- The error check system is far more comprehensive and dynamic now. If your sources don’t match your uses, or your draw schedule length does not match your construction period, the model will clearly alert you.