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PROJECT MONITORING – STUDY GUIDE AUTHORS AND EDITORS: Yury Modulevsky PQS Clint Kissoon PQS Bill Nichols PQS
Transcript
Page 1: Study Guide

PROJECT MONITORING – STUDY GUIDE

AUTHORS AND EDITORS:

Yury Modulevsky PQSClint Kissoon PQSBill Nichols PQS

JANUARY 2012

Page 2: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

TABLE OF CONTENTS

PAGE

Study Objectives 1

Suggested Questions 5

Section 01 The Need For Independent Project Monitoring Services 8

Section 02 Functions and Documentation 13

Section 03 Types of Construction Loans 17

Section 04 Budget Review Report 27

Section 05 Progress Draw Report 46

Section 06 Practical Assignment – ResidentialCondominium 55

Section 07 Practical Assignment – Freehold Housing Development 84

References 102

Page 3: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Study Objectives

Upon completion of section No. 1 the students should be able to:

Identify the nature of risks and uncertainties involved in construction

Identify major responsibilities of the owner - developer / project manager / project

monitor

Identify reasons for borrowing and understand the nature of major covenants

imposed by lenders

Upon completion of section No. 2 the students should be able to:

Identify project monitoring functions

Identify the extent of documentation required for a Budget Review and Progress

Draw Report

Upon completion of section No. 3 the students should be able to:

Identify the major characteristics of non-revolving loans and revolving loans

Identify the major differences between these two types of loans and types of

construction financed by each

Learn the major tasks and the sequence in which they are required to be performed

when dealing with non-revolving and revolving loans

Identify the conditions precedent generally imposed for each type of loan

1

Page 4: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Study Objectives

Upon completion of section No. 4 the students should be able to:

Identify why a project budget review is important and what major sections

comprise the report

Identify the scope of important notes and disclosures included in the executive

summary

Learn how to balance source and use of funds with the project budget

Learn the basics of primary and secondary margin calculations

Learn the importance of a project introduction for each type of construction

Identify the scope of source documents required to be reviewed

Identify the extent of general notes and comments in the budget analysis

Upon completion of section No. 5 the students should be able to:

Identify the purpose of a progress draw

Identify major sections and parts of a progress draw report

Learn how to calculate the primary and secondary margin

Identify the extent of general notes and comments in the budget review and

analysis

2

Page 5: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Study Objectives

Upon completion of section No. 6 the students should be able to:

List and explain importance of each phase of the preliminary work

Identify scope of the documentation required to complete each phase of the budget

review and progress draw

Set up source and use of funds based on information provided in the lender’s

commitment letter

Identify the equity calculation and its importance

Identify each of the spreadsheets used in the report, explain their parts, sections

and relationship

Identify the concept of cost accruals and explain its importance

Upon completion of section No. 7 the students should be able to:

Identify specific issues related to a single family housing development

Learn the difference between margin calculation site servicing and single family

housing development component

Understand sales mix and single family housing budgets

Learn concept of work evaluation and work in place for construction cost

summary for a single family housing development

Identify each of the spreadsheets used in the report, explain their parts, sections

and relationship

3

Page 6: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Suggested Questions

Section No. 1

Define types of major risks and uncertainties involved in construction

Explain why the objectives of project managers differ from those of owner-

developers and project monitors

List, discuss and explain why lenders impose conditions (covenants) on owners-

developers

Section No. 2

Define how the project monitoring functions vary due to the type of task and

construction

Identify which of the listed documents are the most important and least important

for each type of construction

Section No. 3

Define major characteristics of non-revolving loans

List major conditions precedent for different type of construction and explain why

they are important to the lenders

Explain the methods of repayment for non-revolving loans

4

Page 7: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Suggested Questions

Section No. 3 (Continued)

List major tasks which are required to be performed when dealing with non-

revolving loans, explain importance and reasons for performing these tasks.

Define major characteristics of revolving loans and methods of repayment

List major conditions precedent for revolving loans and explain why they are

important to the lenders

Define the differences between these two types of loans

List major tasks which are required to be performed when dealing with revolving

loans, explain importance and reasons of these tasks and reasons for performing

these tasks

Section No. 4

Define the differences between a budget review and progress draw

List the major sections of a budget review and explain their importance

Define scope and extent of disclosures in important notes (regarding different

types of construction)

Define how to set up source and use of funds based on the conditions in the

lender’s commitment letter

Explain the concept of primary and secondary margin calculations

5

Page 8: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Suggested Questions

Section No. 4 (Continued)

Explain the importance of the project monitor’s certificate

Define the extent of information carried on the certificate

Define the scope and importance of project statistics for each type of construction

Explain why source documents are required to be reviewed

Define the extent of comments and notes in the detailed commentary of the project

budget

Explain the importance of the project contingency and method of assessing its

adequacy

Explain effect of HST on the project source and use of funds

Define the extent of general notes and comments in the budget analysis

Section No. 5

Define differences between a budget review and progress draw

List major sections of a progress draw and explain their importance

Define scope and extent of disclosures in important notes

Define the extent of information carried on the project monitor’s certificate

Explain the concept of primary and secondary margin calculations

Define the extent of comments and notes in the detailed commentary of the project

budget

Explain the importance of the project contingency and method of assessing its

adequacy

Define the extent of general notes and comments in budget analysis

6

Page 9: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Suggested Questions

Section No. 6

List and explain required procedures to complete

What information is presented on margin calculation spreadsheet, explain where

this information is drawn from and how it is used

Explain the concept of financing program calculation

Explain importance of each group of data on capital cost summary

List major budget divisions and describe what is included in each of them

Explain importance of each construction cost summary

Why is cash flow important for the budget review, how is information presented

there linked with capital cost summary and margin calculation

What information is presented on the sales summary, why is it important to keep

track of sale deposits received

Explain what information from the sales summary is linked with that on the capital

cost summary and margin calculation

Section No. 7

Identify conditions precedent associated with single family housing development

Why is site servicing treated separately from single family housing component

What information is carried on the lot summary

Explain importance of each group of data on capital cost summary

What comprise the home model budget

Define the concept of work in place and method of its evaluation

Define the concept of maximum loan availability

7

Page 10: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 01 The Need for Independent Project Monitoring Services

Study Objectives Upon completion of this section the students should be able to:

Identify the nature of risks and uncertainties involved in construction

Identify major responsibilities of the owner - developer / project manager / project

monitor

Identify reasons for borrowing and understand the nature of major covenants

imposed by lenders

All construction projects are risky in nature and exposed to the following uncertainties such as:

Contract and contractual performance risk which is associated with the uncertainty that:

- Firstly, the owners/developers or lenders may not pay the contractors;

- Secondary, the contractors may not perform on time and with required quality;

Site production risk associated with labour uncertainty, poor site management or

selection of equipment, and poor understanding of the project design;

The construction industry is complex and the owners/developers do not necessarily have

the expertise to check all technical details and cost issues of the proposed design;

Traditionally, the owners/developers select project managers to oversee all aspects of the project

such as:

Work closely with the architect and consultants;

Work with the suppliers;

Be responsible for the delivery of quality and schedule;

Monitor construction costs and budgets;

8

Page 11: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 01 The Need for Independent Project Monitoring Services

Normally, the project manager is more interested in meeting the deadlines than providing accurate

budget monitoring and cost reporting.

While reporting ongoing construction progress, often problems with improper costing, change

orders and cost overruns are left to the end of the project.

There are following are the main reasons for project monitoring services to be utilized in the

construction process:

The project manager acting, as a project’s owner/developer agent would appear to be in a

conflict of interest situation since his/her service is paid by the borrower.

The architect and/or consulting engineers are usually not trained in the skills of project

management and construction cost estimating.

A Cost Consultant by nature of his/her training in cost estimating, scheduling and contractual

matters has a good grasp of the services expected.

The project owners/developers prefer to borrow project funds from lending institutions such

as Banks, Trust Companies and Pension Funds, therefore the need for independent project

monitoring and reporting significantly increases;

Q: Why do the owners/developers prefer to borrow money instead of financing the

projects with their own funds?

A 1: They are interested in minimizing the portion of working capital to be tied to one

project and thus increasing their profit margins.

A 2: They can write off interest expense associated with the loan balance as a

legitimate business expense and decrease income tax.

9

Page 12: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 01 The Need for Independent Project Monitoring Services

Lenders’ Conditions (Covenants)

The lenders are willing to provide their money to the project owners/developers subject

to certain constrains or conditions (covenants).

Q: What are the conditions (covenants) imposed by the lenders on the borrowers

prior to release of their funds into the project?

A 1: Clear title to the land – meaning that the borrower has to have unconditional

possession of the land used for the construction project.

A 2: Borrower’s Equity in the project – normally at least 25% of the project value must

be funded by the borrower prior to the lender’s initial release of funds.

Minimum borrower’s equity requirement is usually achieved by purchase of land.

However lenders sometimes stipulate additional cash equity to be injected into the

project in excess of the land purchase.

The value of cash equity is determined by the size of the project, type of the project and

level of risk associated with the project’s completion.

A 3: The borrower has to provide for a review project’s budget and schedule, which are

meaningful and reflect the technological sequence of the construction process.

A 4: The borrower has to contract reputable design consultants, who have to be

professionals and experienced in the appropriate construction sector.

A 5: The borrower may have to achieve a certain level of sales (if residential or

commercial) – a minimum acceptable number of units have to be sold to the direct users

(residential condominium or freehold housing development) or leased (commercial

development)

10

Page 13: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 01 The Need for Independent Project Monitoring Services

Lenders’ Conditions (Covenants)

Q: What are the conditions (covenants) imposed by the lenders on the borrowers

prior to release of their funds into the project? (Continued)

A 6: The borrower has to achieve a certain level of contracts/ trade contract

commitments. Existence of executed stipulated price contracts significantly decreases

exposure to the cost overruns of the hard costs construction and hard costs site servicing

budgets. Usually from 60% to 70% level of committed cost of the construction budget is

required by the lender at the time of their initial release of funds.

A 7: The following insurance arrangements are always required:

valid general liability and builders all risk insurance policies to protect the lender

from potential loss in case of fire, explosion or other accidents.

A builders all risk insurance cover should be at all times equal or higher than the

hard costs construction budget. It is also very important to confirm that the lender

is named as co-insured.

A 8: Often, the borrower requires material and labour bonds to be issued in order to

assure completion of the major construction contracts and professional services and will

require dual or multiple obligee riders.

A 9: Typically the employment of a project monitor bridges the knowledge gap between

the lender and project owner/developer and/or project manager and will eliminate the

lender’s risk of over advancing funds to the project. Often the lender will also require an

architect’s payment certificate. The funds can be cut or held back by the project monitor

if a major deviation from the budget is found.

The project monitor provides the lender with the combination of technical insights and

financial expertise on each stage of the development to insure that the general contractor /

project manager is delivering the project on time and on budget.

11

Page 14: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 01 The Need for Independent Project Monitoring Services

Suggested Questions Review Construction Budgeting by Frank W. Helyar, issued 2011,

Chapter 8 (pages 82-86)

Define types of major risks and uncertainties involved in construction

Explain why the objectives of project managers differ from those of owner-

developers and project monitors

List, discuss and explain why lenders impose conditions (covenants) on the

owners-developers

12

Page 15: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 02 Functions and Documentation

Study Objectives Upon completion of this section the students should be able to:

Identify project monitoring functions

Identify the extent of documentation required for a Budget Review and Progress

Draw Report

(i) Functions:

Complementary to the traditional project management functions, the project

monitoring functions are independently provided to the owners/developers and the

lenders to ensure that their interests are completely protected.

If retained by the lender to provide an independent review, the project monitor’s

functions include, but may not be limited to:

Review relevant project documentation regarding land development;

Review original construction budgets for accuracy and consistency;

Verify borrower’s equity (project owner/developers’ share of funds injected in the

project);

Ensure the accuracy of the borrower’s accounts payable and cost control systems;

Assist lenders with the project economics;

Conduct on-site visits to ensure that the reported cost to date corresponds with that

claimed, and to ensure adherence to budgets and schedules;

Provide timely cost to date reports;

Approve monthly cost to date reports prior to submission for reimbursements;

Ensure cost to complete is adequate if current contractor completes the project.

13

Page 16: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 02 Functions and Documentation

(ii) Documentation:

There are two major types of reports prepared by project monitor:

Budget Review Report;

Progress Draw Report.

Depending on the type of construction and complexity of the project it requires on

average from 40 to 80 hours to complete a Budget Review Report and from 8 to 24

hours to complete a Progress Draw Report.

Generally there are four types of construction, which require specific reporting:

Commercial development;

Industrial development;

High-rise (low-rise) condominium development;

Freehold housing development.

Prior to commencing the budget review, the project monitor has to request and receive

the required documentation. The list of the documents varies depending on the type of

construction project; however the core list includes the following documents:

Complete set of approved site servicing drawings and specifications (roads, hydro,

landscape, grading);

Complete set of construction tender drawings (architectural, structural,

mechanical/electrical and other) and specifications;

Borrower’s project budget for hard and soft construction costs, together with the

project cash flow and construction schedule. When dealing with free-hold housing

development, the model home(s) budget is required. For this type of construction the

overall hard cost construction budget depends on the model mix chosen by the

potential purchasers.

14

Page 17: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 02 Functions and Documentation

(ii) Documentation:

Construction contracts relating to site servicing such as: demolition, roads, hydro,

landscape, grading and such, or consultants estimates if no contracts available;

Construction schedule, schedule of closing for free-hold housing developments;

Land Purchase and Sale Agreement;

Management Agreement, Co-tenancy Agreement;

Confirmation of existence independent bank account to serve the project;

Copies of leases of offers to lease and up to date leasing schedule for commercial

developments;

Typical Purchase and Sale Agreement, up to date sales summary which outlines the

following data: number of firm sales, total value of units sold ($), value of deposits

received ($), schedule of closing dates;

Confirmation of registry with Tarion (Ontario New Home Warranty Plan) for high-rise

condominium and free-hold residential developments;

Confirmation of borrower’s equity injected into the project such as costs to date paid

directly by the borrower from its own funds proved by copies of cancelled cheques and

bank statements;

Borrower’s cost to date report, copies of all unpaid invoices accompanied with the aged

accounts payable listing.

Soils (Geotechnical) Report;

Environmental Audit Reports (Phase I and II)

Applicable Development Studies such as: Noise, Traffic, Wind and such;

Interim financing agreement (Lender’s Commitment Letter);

Realty tax assessment or current year realty tax bill;

15

Page 18: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 02 Functions and Documentation

(ii) Documentation:

Development Agreements with: Region, City, Municipality, Hydro, etc., which

specify the value of charges and levies;

Evidence of site plan approval, conditions of Draft Plan approval and compliance

with applicable Zoning By-law;

Valid Building Permit(s);

Legal Survey;

Confirmation of required Insurance coverage;

Suggested Questions Review Construction Budgeting by Frank W. Helyar, issued 1993,

Chapter 8 (pages 82-86)

Define how the project monitoring functions vary due to the type of task and

construction

Identify which of the listed documents are the most important and least important

for each type of construction

16

Page 19: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 03 Types of Construction Loans

Study Objectives Upon completion of this section the students should be able to:

Identify the major characteristics of non-revolving loans and revolving loans

Identify the major differences between these two types of loans and types of

construction financed by each

Learn the major tasks and the sequence in which they are required to be performed

when dealing with non-revolving and revolving loans

Identify the conditions precedent generally imposed for each type of loans

Non Revolving Loans

(a) Description and Conditions Precedent

Lenders make available non-revolving loans to finance the following types of

construction:

Industrial developments;

Commercial developments;

Residential condominiums (high and low rise);

Servicing portion of freehold housing developments;

The loan value, terms and conditions precedent of availability and methods of

repayment are outlined in the commitment letter issued by the lender and signed by the

borrower.

Terms and conditions precedent of availability and methods of repayment depend on

the type of construction.

For example, the conditions precedent for high-rise condominium development may

include:

Number of firm sales residential units (at least 45% – 50% of total units available);

17

Page 20: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 03 Types of Construction Loans

Non Revolving Loans

Minimum unit sale price or average unit sale price (to assure the lender that it is not

below market price);

Minimum gross revenue generated by sale of residential units;

Minimum amount of cash receipts from the purchasers of the units, which has to be

injected into the project prior to commencement of external financing (using lender’s

funds).

The conditions precedent for commercial developments would include:

Number of lease agreements signed with the tenants;

Average rent per square foot of leased area;

Terms of leases (period of time);

Value of fit-up allowances;

Non revolving loans usually last for the period of construction (4 months to 2 years)

until the permanent financing of the projects becomes available.

Methods of repayment depend on the type of the project:

The proceeds from the permanent financing for industrial and commercial

developments;

The proceeds from the sales of residential units for condominiums and the servicing

component of freehold developments.

18

Page 21: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 03 Types of Construction Loans

Non Revolving Loans

(b) List of Tasks to be Performed

When dealing with Non Revolving Construction loans the project monitor has to

perform the following tasks:

Confirm that the borrower has opened a separate bank account;

Review all purchaser deposit cheques and reconcile the purchaser deposits against the

total cost of construction incurred to date to confirm that all purchaser deposits

received to date have been utilized to finance solely to pay for the project related costs;

Review copies of all leases and offers to lease and confirm the following (for I.C.I.

Projects):

Terms of lease;

Lease value ($);

Area of leased space;

Tenant inducement conditions.

Review Purchase and Sale Agreements (Residential) to confirm:

Purchase price;

Amount of deposits to be received;

Closing dates;

List and value ($) of upgrades.

19

Page 22: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 03 Types of Construction Loans

Non Revolving Loans

(b) List of Tasks to be Performed

Review architectural, structural, mechanical/electrical drawings for completeness and

consistency;

Confirm that the budget is based on the most current version of the drawings and all

changes in the drawings are properly reflected on the list of change orders and

correspond to the revisions in the budget;

Obtain the required level of knowledge of the project based on the drawing review. A

brief technical description of the project should be presented as a part of the Budget

Review Report;

Calculate Gross Floor Area to compare costs of similar project elements under review

with those of historical projects;

Review site servicing drawings and specifications (roads, hydro, water/sewage,

landscape, grading);

Review borrower’s proposed site servicing and hard costs construction budgets and

comment on their adequacy;

Hard costs construction budget has to be supported by trade contracts. In the event

trade contracts are not available costs have to be based on industry standards or

confirmed by project monitor.

20

Page 23: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 03 Types of Construction Loans

Non Revolving Loans

(b) List of Tasks to be Performed

Review all major trade contracts to obtain confirmation that their contractual obligations

include completion of the project, such as:

Site Servicing (Demolition, Earthwork, Water and Sewage, Grading and Paving,

Hydro Servicing);

Core Building (Foundation and Formwork, Concrete and Drain, Lumber, Carpentry,

Brick, Drywall, Finishing contracts, Elevator contract);

Mechanical/Electrical (Electrical contracts – Internal and External, Plumbing contract, HVAC contract);

Review all change orders in respect of contract work to ensure adequacy of cost(s) and

provide suitable recommendations.

Review soil tests and environmental audits to:

Understand how the analysis and recommendations therein will impact the project

construction budget;

Ascertain that any recommendations therein have been incorporated into the plans

and specifications.

Review borrower’s construction time schedule in the context of the project plans and

specifications and the general contracting or management contract to determine if it is

realistic.

Review invoices, cancelled cheques and bank statements to confirm that the borrower’s

equity in cash terms has been injected into the project in accordance with the condition

precedent of the lender’s Commitment Letter.

21

Page 24: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 03 Types of Construction Loans

Non Revolving Loans

(b) List of Tasks to be Performed

Review borrower’s holdback summary to assure that appropriate amounts are retained in

accordance with the Construction Lien Act.

Review all material items, which ought to be included in the project budget with a view

to determining that such allowances are reasonable, adequate, complete and consistent.

Review insurance certificates to confirm that the sum insured, names of insured parties,

loss payable and period of coverage are adequate.

Review land costs.

Historical costs in accordance with the Land Purchase and Sale Agreement.

Property taxes payable for the period of construction.

Review of documentation in the course of assessing the project budget to ensure in the

fullest reasonable extent the adequacy of such budget, including but not limited to:

Building Permits;

The Lender’s Commitment letter;

Development and other Municipal and Regional Agreements;

Management Agreements;

Consultants’ Agreements including Design, Sales, Marketing and Legal.

During any period of construction related site activity or actual construction within the

validity of the project loan, submit monthly site inspection and cost reports and certificate

of work completed in order for the lender to process the advance.

22

Page 25: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 03 Types of Construction Loans

Revolving Loans

(a) Description and Conditions Precedent

Revolving loans are made available to finance housing portion of freehold residential

developments.

The loan value, terms and conditions precedent of availability and methods of repayment are

outlined in the Commitment Letter issued by the lender and signed by the borrower.

Repayment of such loans occurs every time when a freehold house is completed and occupied

(closed).

The proceeds of the payment received from the purchaser is applied against the revolving loan

balance and very often also against the non revolving land servicing loan when both types of

financing are used for the same project.

The conditions precedent for revolving loans available for freehold housing development may

include:

Number of firm sales housing units (in general 45% – 50% of total units available);

Minimum units sale price or average sale price of a house (to assure the lender that it is

not below market price);

Minimum gross revenue generated by sale of houses;

Minimum amount of cash receipts from the purchasers of the houses, which has to be

injected into the project prior to starting of external financing (using lender’s funds);

Maximum allowable number of houses to be built simultaneously;

Maximum allowable number models allowed to be built;

Maximum number of unsold houses to be built;

Maximum construction budget per each house and each model.

23

Page 26: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 03 Types of Construction Loans

Revolving Loans

(b) List of Tasks to be Performed

1. Confirm that the borrower has opened a separate bank account.

2. Review all purchaser deposit cheques and reconcile the purchaser deposits against the

total cost of construction incurred to date to confirm that all purchaser deposits received

to date have been utilized.

3. Review proposed borrower’s model budget and comment on the adequacy of the same.

Hard costs budget has to be supported by trade contracts. In the event trade contracts are

not available, costs are to be based on industry standards.

4. Review all major trade contracts to confirm that contractual obligations are complete

on the completion of each housing unit.

5. Review all change orders in respect of contract work to ensure adequacy of cost(s) and

provide suitable recommendations.

6. During any period of construction related activity or actual house construction within

the project; submit monthly inspection reports in order for the lender to process the

advance.

7. The lender shall reserve the right to instruct the project monitor to provide such a

monthly inspection report, at any time at its sole discretion, regardless of whether the

borrower has made a formal draw request for funds or utilized the revolving construction

loan.

24

Page 27: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 03 Types of Construction Loans

Revolving Loans

8. When dealing with revolving loans on freehold housing projects, cost to date is

determined based on the visual evaluation of each housing unit on the site as a percent of

completion of the major elements of the budget such as:

Excavation and backfill;

Foundation;

Masonry;

Rough Carpentry;

Roof;

Doors and Window;

Finishes;

Mechanical/Electrical.

25

Page 28: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 03 Types of Construction Loans

Suggested Questions Review Construction Budgeting by Frank W. Helyar, issued 2011,

Chapter 8 (pages 82-86)

Define major characteristics of non-revolving loans

List major conditions precedent for different type of construction and explain why

they are important to the lenders

Explain the methods of repayment for non-revolving loans

List major tasks which are required to be performed when dealing with non-

revolving loans, explain importance and reasons for performing these tasks

Define major characteristics of revolving loans and methods of repayment

List major conditions precedent for revolving loans and explain why they are

important to the lenders

Define the differences between these two types of loans

List major tasks which are required to be performed when dealing with revolving

loans, explain importance and reasons for these tasks and reasons for performing

these tasks

26

Page 29: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 04 Budget Review Report

Study Objectives Upon completion of this section the students should be able to:

Identify why a project budget review is important and what major sections

comprise the report

Identify the scope of important notes and disclosures included in the executive

summary

Learn how to balance source and use of funds with the project budget

Learn basics of primary and secondary margin calculations

Learn importance of a project introduction for each type of construction

Identify the scope of source documents required to be reviewed

Identify the extent of general notes and comments in the budget analysis

There are two major types of reports prepared by the project monitor such as:

Budget Review Report

Progress Draw Report

Depending on the type of construction and complexity of the projects it requires on

average from 40 to 80 hours to complete a Budget Review Report and from 8 to 24 hours

to complete a Progress Draw Report.

A Budget Review Report is usually prepared prior to initial fund transfer and does not

specify amount of the draw.

In many occasions however, the Budget Review Report is completed simultaneously with

the Progress Draw No. 1.

27

Page 30: Study Guide

PROJECT MONITORING – STUDY GUIDERevision No.3

Section 04 Budget Review Report

The Budget Review Report generally consists of the following sections:

Executive Summary;

Project Monitor’s Certificate;

Project Introduction;

Budget Review;

Appendices.

Executive Summary – is a brief description of the findings as they relate to the project

budget and status of the project. It also carries a disclosure which outlines the project

monitor’s responsibilities with respect to the project including:

A review of the project budget costs covering the hard and soft cost of the development

and construction and,

Provide ongoing progress draw reports.

Executive Summary

(a) Project Profile – a brief description of major components the project is comprised from

such as:

Type of construction;

Number of units;

Gross Floor Area

Project’s status (Phase I or II)

Project’s location;

Project’s functionality.

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Section 04 Budget Review Report

Executive Summary

(b) Important Notes – indicates all issues, which in the project monitor’s opinion require the

lender’s attention such as:

Disclose value of overall project budget and the same presented per selling unit

(apartment, suite, house, bay etc.);

Disclose value of hard cost construction budget, the same presented per selling unit

(apartment, suite, house, bay etc.);

Disclose value of land and site servicing budget if they are financed from a separate

funding facility;

Disclose value of available project contingency in dollars and in percentage related to the

cost to complete;

Disclose level of committed costs as confirmed by a review of major contracts and

quotations;

Existence of a valid Building Permit;

Confirmation of the borrower’s registry with Tarion (Ontario New Home Warranty

Program) and date of expiry (for residential construction developments – high rise

condominiums and freehold housing);

Confirmation of a proper zoning agreement;

Confirmation of existence of valid General Liability and Builder’s Risk Insurance

Policies in place with an adequate coverage in dollar value and in time frame. It is also

important to disclose if the lender in named as additional insured;

Review and comment on the Phase II and Phase I Environmental Site Assessments to

disclose if there are any issues which may impact the overall project budget;

Confirmation, based on review of the legal survey that there no not appear to be any

easements or encumbrances that would negatively affect the project;

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Section 04 Budget Review Report

Executive Summary

(b) Important Notes (Cont.)

In general terms it is very important to disclose in this section if there are any of the

conditions precedent outlined by the lender in the Commitment letter that are not met by

the borrower.

(c) Project Budget and Source and Use of Funds

Outlines the way in which financing program was set up by the lender and how it

applies to the overall budget. Here could be a variety of possible combinations

determined by the type of the construction and risk associated with the loan

repayment. Please see the following example for construction of a condominium:

Credit Facility No. 1 – Demand Loan, Non-Revolving

Lender’ Construction Mortgage $5,000,000

Borrower’s Land Equity 500,000

Borrower’s Cash Equity 600,000

Purchasers’ Deposits 400,000

Deferred HST on Closing 200,000

Total Source of Funds $6,700,000

Project Budget $6,700,000

Shortfall/Surplus $ 0

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Section 04 Budget Review Report

Executive Summary

Analysis of Credit Facility No. 1:

The lender is willing to advance the first portion of its loan of $5,000,000 only if the

borrower has injected $1,100,000 of its own money into the project by the way of

buying a parcel of land $500,000 and paying for the construction start up costs

$600,000 most of which is usually on the soft cost side such as payments to the

architect, structural, civil, mechanical / electrical consultants for the project design

and sales / marketing consultant to initiate advertising program. The lender has set

up a target for the borrower to achieve a certain level of sales, which are capable of

generating $400,000. Suppose that an average $20,000 is a value of purchaser

deposits therefore at least 20 sales are required. The purchaser deposits are usually

held in trust and continuously released to the borrower to be injected into the project.

Please note that $400,000 in this example is only a minimum set up by the lender.

The borrower is always interested in exceeding this target in order to decrease his

exposure to borrowing and save on interest expense.

The lender is willing to allow the borrower to use $200,000 of HST payable on the

closing of the units since this amount is deferred until the project is completed and

occupied. Please note that this is an approximated value since the HST calculation

on housing and condominiums is a complicated calculation it is excluded from the

material of this course.

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Section 04 Budget Review Report

Executive Summary

Analysis of Credit Facility No. 1:

With respect to the terms of engagement set up by the lender, the project monitor in

this case shall:

Confirm by the way of reviewing the Agreement of Purchase and Sale of Land and

report to the lender is the borrower in fact has paid $500,000 for the land and if the

land’s ownership is not in question;

Confirm by the way of reviewing vendors’ invoices, cancelled cheques and bank

statements and report to the lender if the borrower in fact has paid a minimum of

$600,000 of its own money to the vendors at the initial stage of construction;

Confirm by the way of reviewing sales summary and report to the lender that the

borrower in fact has received $400,000 in purchaser deposits and confirm with a

trustee that this amount has been released and consequently injected into the project;

(d) Sales Summary – the project monitor has to report the number of pre-sales achieved

by the borrower. There could be also additional conditions imposed by the lender

such as:

The borrower is required to achieve a minimum of $4,200,000 of sales revenue prior

to the first advance;

The borrower has to achieve a minimum of 60% of pre-sales prior to the first

advance;

A minimum selling price of a unit should be at least $150,000;

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Section 04 Budget Review Report

Executive Summary

Analysis of Credit Facility No. 1:

(e) Current Advance – if only Progress Draw Report No. 1 is carried simultaneously with the

Budget Review Report. The following information is presented here:

Based on the review of invoice documentation a gross cost to date is $2,450,000,

after deduction of construction holdback totaling $150,000 the net cost to date is

$2,300,000;

The site visit was made on January 15, 2012 to confirm work in place;

Stated calculated amount of the first advance using primary and secondary methods

of advance calculation;

Presented below are Primary and Secondary Margin Calculations carried for Non

Revolving Construction Loans:

PRIMARY MARGIN CALCULATION

Gross Cost to Date $2,450,000

Less, Holdback Retained 150,000

Less, Land Equity 500,000

Less, Cash Equity 600,000

Less, Deposits Released 400,000

Loan Ceiling $ 800,000

Less, Loan Outstanding 0,000

Current Advance $ 800,000

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Section 04 Budget Review Report

Executive Summary

(e) Current Advance (Cont.)

SECONDARY MARGIN CALCULATION

Credit Facility No.1 $5,000,000

Total Budget $6,700,000

Less, Cost to Date 2,450,000

Less, Cost to Complete 4,250,000

Less, Holdback Retained 150,000

Add, HST on Closing 200,000

Loan Ceiling $ 800,000

Less, Loan Outstanding 0,000

Current Advance $ 800,000

(f) Construction Schedule – it is the project monitor’s duty to note if there is a delay from

the project schedule and indicate the reason for the delay, since it potentially could affect

the closing dates, extend the term of construction and increase the project budget.

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Section 04 Budget Review Report

Project Monitor’s Certificate

This section is included in the Budget Review Report only if Project Draw Report

No. 1 is carried simultaneously. A Certificate is usually co-signed by a firm’s Chief

Operating Officer and a project monitor in charge of the project.

The following information is presented on the Certificate:

Names of the lender, the borrower and legal name of the project;

Number of advance, description and number of the loan facility(s);

Date when the site visit was performed;

A disclaimer stating that the project monitor does not inspect the project on the

full time basis. Hence he relies on representation and declarations of the Project

Manager / Architect / Engineer’s in connection with the quality of workmanship

and compliance with the approved plans and specifications;

Verified current cost in place based on the site visit and review of the project

invoices (Non Revolving loans);

Verified cost in place based on the site visit and visual evaluation of the stage of

the project (Revolving loans);

Value of unutilized project contingency stated in dollars and in percentage of

cost to complete;

Value of current advance as per Secondary Cost to Complete Margin

Calculation and value of loan outstanding to date.

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Section 04 Budget Review Report

Project Introduction

This section consists of project profile part and data employed part.

(i) Project Profile - starts with the brief description of the project under review (same as

in Executive Summary) and followed by:

A detailed breakdown of the project in the form of a table which lists all types of

units and associated areas, number of units, total saleable and total floor area for

residential condominium development;

Residential Development

Floor Level Gross Floor Area, S.F.

Net Floor Area, S.F.

Ground Floor 29,924 23,9172nd Floor 29,876 27,5443rd Floor 29,604 27,5444th Floor 29,604 27,5445th Floor 29,604 27,544

Total Above Ground 148612 S.F. 134093 S.F.

Commercial Development

A detailed breakdown of the project in the form of table which lists types and number of

leasing blocks, associated leased and gross floor areas, leasing status, names of the

tenants (firmed and potential) for commercial development;

Building Status Area/S.F.Retail Leased – Open for Business 6,878Bank Leased – Open for Business 6,491Block B Leased – Open for Business 7,243Block C Leased – Open for Business 12,285Block D 45% Leased – Open for Business 36,675Block E 23% Leased – Under Construction 21,530Block F 0% Leased – Not Under Construction 20,580Block G 0% Leased – Not Under Construction 25,371Total Area 137053

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Section 04 Budget Review Report

Project Introduction

Project Profile (Cont.)

Commercial Development (Cont.)

Tenant Leased Area, Square Feet

Area,Square Feet

Retail 6,878 6,878Bank 6,491 6,491Block B Available 0 0Coffee Shop 3,196 3,196Pizza Shop 2,465 2,465Sandwich Shop 1,582 1,582Block C Available 0 1,105Video Shop 5,100 5,100Cards Shop 4,528 4,528Tea Shop 1,552 1,552Block D Available 0 20,123Wine Shop 8,525 8,525Pharma Shop 8,027 8,027Block E Available 0 16,690Dress Shop 4,840 4,840Block F Available 0 20,580Block G Available 0 25,371Total Area 53184 137053

Freehold Housing Development

A detailed breakdown of the project in the form of table, which lists number of

lots, types and model names and associated areas, and their status for

freehold housing development;

Model Type Pre-Sold and ModelLot Nos.

Closed Lot Nos.

Average Model Area, S.F.

Tiara 2,140Royale 2,940Marquis 10,11, 30(M) 3,120Chateau 3,265Contessa 15 3,398Dutchess 23, 38(M) 3,800Cleopatra 19, 32, 41 3,748Crown 2,681Prince 16, 33, 42 3,138Princess 6, 24, 25 4,160Duke 36 3,743

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Section 04 Budget Review Report

Project Introduction

Data Employed – summarizes all reference materials provided by the borrower and used

to prepare the Budget Review Report. Information has to be presented in a detailed form

such as:

A copy of Architectural drawings prepared by Smith Architect Inc. dated September

25, 2002;

A copy of Electrical drawings prepared by John Engineering Ltd. dated November

10, 2002;

A copy of the borrower’s budget and cost to date report dated October 31, 2002;

A copy of Building Permit No. 12…4 issued by the City of New Market, dated June

24, 2002;

A copy of the Tarion (Ontario New Home Warranty Program) Registered Builder

Certificate No. 123..5 issued to ……… ;

A copy of Phase II Environmental Site Assessment prepared by Jack and Associates

Limited dated August 1, 2002;

A copy of a Builders Risk Insurance Certificate issued by Dominion of Canada Insurance Company, which expires on April 20, 2003;

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Section 04 Budget Review Report

Budget Review

(i) Detailed Commentary on the Project Budget – summarizes all conclusions based

on analysis of available documentation and discussions of the budget details

with the borrower. The budget is presented here as a summary of all major

elements with costs allocated to the overall project, cost per functional unit and

cost per square foot of gross floor area.

Description BudgetCost Per Unit (30 Units)

Cost Per S.F.(32,399)

Land $281,333.00 $9,377.77 $8.68Hard Costs – Servicing 0.00 0.00 0.00Hard Costs – Construction 3,087,289.93 102,909.66 95.29Soft Costs – Development 150,000.00 5000 4.63Soft Costs – Consultants 180,668.55 6,022.29 5.58Administration / Marketing 65,292.00 2,176.40 2.02Finance Charges 54,560.00 1,818.67 1.68Contingency 24,128.46 804.28 0.74HST on Revenue 172,588.06 5,752.94 5.33Total 3734527 6527.21 32414.35

Please note that this table is a condensed reflection of the detailed project budget

presented as in the form of spreadsheet.

Following is a detailed commentary of the project budget:

1. Land

Land cost is carried at a reporting budget of $281,333.00 associated with land acquisition.

We have reviewed a copy of the Land Purchase Agreement in the amount of

$281,333.00.

2. Hard Costs-Site Servicing

All costs associated with site servicing have been included in the hard costs construction

budget.

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Section 04 Budget Review Report

Budget Review

3. Hard Costs – Construction

We have carried a hard cost construction budget of $3,087,289.93, which equates to

$102,909.66 per unit and $92.59 per square foot of gross floor area.

Comments:

If and how the budget is supported by construction contracts, purchase orders,

quotations and letters of intent.

If the budget excludes or includes purchaser extras.

How the budget compares to the similar projects in the surrounding area based

on the dollar value per unit and per square metre / square foot of gross floor

area.

4. Soft Costs - Development

We have carried a reporting budget of $150,000.00 for Development fees, which equates

to $5,000 per unit.

Comments:

If the budget is consistent with the prevailing rates for this area.

If the budget is supported by the schedule of charges stated in the Development

agreement.

If the is budget supported by the costs incurred to date.

5. Soft Costs - Consultants

We have carried a reporting budget of $180,668.55 for soft costs- consultants fees, which

equates to $6,022.29 per unit.

Comments:

If the budget is consistent with the prevailing rates for this type of construction.

If the budget is supported by an agreement(s) with the architect and/or

consulting engineers.

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PROJECT MONITORING – STUDY GUIDERevision No.3

Section 04 Budget Review Report

Budget Review

(i) Detailed Commentary on the Project Budget (Cont.)

6. Administration/Marketing

We have carried a reporting budget for Administration and Marketing fees in the amount

of $65,292.00.

Comments:

If the budget is supported by an agreement(s) with the sales/marketing consults.

If the budget includes for commissions on sold units.

7. Finance Charges

We have carried a budget totaling $54,560.00 for finance charges. We calculate the

finance charges as follows:

Project Monitor Fees are carried in the amount of $9,200.00.

Condominium Appraiser Fees are carried in the amount of $5,000.00.

Interest – Construction Loan budget is carried in the amount of $28,360.00.

The adequacy of the interest expense budget is confirmed by the cash flow

forecast, which is included as one of the appendices.

Commitment Fees are carried in the amount of $10,000.00 in accordance with

the lender’s commitment letter.

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Section 04 Budget Review Report

Budget Review

(i) Detailed Commentary on the Project Budget (Cont.)

8. Contingency

The budget includes a contingency allowance totaling $24,128.46.

We calculate the adequacy of the contingency allowance as follows.

Project Contingency Allowance $24,128.46

Project Cost To Complete 1,702,438.92Less, Project Contingency -24,128.46

Net Cost to Complete 1702438.92

The contingency as a percentage of cost to complete is 1.4%.

Comments:

It is a serious matter to decide if the amount of unutilized contingency is

adequate to complete the project. The decision primarily is based on the

complexity of the project and level of commitment of the cost factors.

Normally, 5% contingency of net cost to complete is deemed to be adequate

at the beginning stage of the project financing if the level of commitment

averages around 70% of the hard cost – construction budget.

Then each addition of committed costs by 10% could decrease the required

level of contingency by 1% in order still to be on the safe side from the

project financing point of view.

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Section 04 Budget Review Report

Budget Review

(i) Detailed Commentary on the Project Budget (Cont.)

9. HST

We have carried a budget of $168,729 for deferred HST on closing as set out in the

lender’s commitment letter.

Comments:

There could be two situations with respect to HST treating of a particular project as per

the lender’s decision:

The project may be HST neutral when HST amounts paid by the borrower

are not to be compensated from the lender’s credit facility. This creates a

shortfall of funds on the borrower’s side since there is always a time gap

between payment of HST and receipt of HST rebates.

The lender may allow the project monitor to include amounts paid by the

borrower as HST on payable in the Margin Calculations in order to be

funded by the credit facilities. In this case, all HST rebates received by the

borrower have to be utilized to finance the project.

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Section 04 Budget Review Report

Budget Review

General Notes and Comments – consists of reviews, analysis and comments on the following

documentations:

Site Plan Control Agreement;

Agreement of Purchase and Sale of Land;

Government Permits and Consents;

Contracts;

Bonding;

Tarion (ONHWP) Certification;

Soil Reports – Geotechnical Investigation;

Phase I and Phase II – Environmental Site Assessments;

Noise Impact Assessment;

Traffic Impact Study

Land Survey

Insurance Policies;

Consultants’ Quality Control Reports.

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PROJECT MONITORING – STUDY GUIDERevision No.3

Section 04 Budget Review Report

Suggested Questions Review Construction Budgeting by Frank W. Helyar, issued 2011,

Chapter 8 (pages 82-86)

Define differences between a budget review and progress draw

List the major sections of a budget review and explain their importance

Define scope and extent of disclosures in important notes (regarding different

types of construction)

Define how to set up source and use of funds based on the conditions in the

lender’s commitment letter

Explain the concept of primary and secondary margin calculations

Explain importance of project monitor’s certificate

Define the extent of information carried on the certificate

Define the scope and importance of project statistics for each type of construction

Explain why source documents are required to be reviewed

Define the extent of comments and notes in the detailed commentary of the project

budget

Explain the importance of the project contingency and method of assessing its

adequacy

Explain effect of HST on the project source and use of funds

Define the extent of general notes and comments in the budget analysis

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PROJECT MONITORING – STUDY GUIDERevision No.3

Section 05 Progress Draw Report

Study Objectives Upon completion of this section the students should be able to:

Identify the purpose of a project draw

Identify major sections and parts of a project draw report

Learn how to calculate the primary and secondary margin

Identify the extent of general notes and comments in the budget review and

analysis

Progress Draw Report is usually prepared for the purpose of the transfer of funds and

normally is prepared on a monthly basis. However in some occasions if the borrower

does not have an immediate need of external funds the progress draw reports may be

completed on a quarterly basis.

A Progress Draw Report consists of the following sections:

Executive Summary

Project Monitor’s Certificate

Financial Requirements

Budget Review

Appendices

Executive Summary – is a brief description of the findings as they relate to the project

budget during the reporting period. It also includes a disclosure, which outlines the

project monitor’s responsibilities with respect to the project under review.

(a) Project Profile – a brief description of the major components of the project with

indication if any changes which occurred during the reporting period.

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Section 05 Progress Draw Report

Executive Summary

(b) Important Notes – indicates all issues which in the project monitor’s opinion

require the lender’s attention and which could affect the project budget during

the current or future reporting periods. It usually includes the following

information:

Disclose value of overall project budget, the same presented per selling unit

(apartment, suite, house, bay etc.) and the same presented per square foot / square

meter of gross floor area, if and how they changed during the reporting period;

Disclose value of hard cost construction budget, the same presented per selling unit

(apartment, suite, house, bay etc.) and the same presented per square foot / square

meter of gross floor area, if and how they changed during the reporting period;

Disclose value of land and site servicing budget if they are financed from a separate

funding facility, if and how they changed during the reporting period;

Disclose value of available project contingency in dollars and in percentage of the

cost to complete and how it changed during the reporting period;

Disclose level of committed costs as confirmed by the review of major contracts and

quotations, if and how they changed during the reporting period;

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Section 05 Progress Draw Report

Executive Summary

(c) Sales Summary – the project monitor has to report:

Number of pre-sales achieved by the borrower during the reporting period and

project to date;

Value of sales revenue, project to date;

Value of purchasers’ deposits released into the project to date;

Confirm that all sales are arm’s length and no bulk sales are entertained.

(d) Construction Schedule – the project monitor has to indicate if there are any issues,

which could affect construction schedule during this reporting period, and in the

future.

Project Monitor’s Certificate – includes the following information:

Names of the lender, the borrower and legal name of the project;

Number of advance, description and number of the loan facility(s);

Date when the site visit was performed;

A disclaimer stating that the project monitor does not inspect the project on the

full time basis. Hence he relies on representation and declarations of the project

Manager / Architect / Engineer’s in connection with the quality of workmanship

and compliance with the approved plans and specifications;

Verified current cost in place based on the site visit and review of the project

invoices (Non Revolving loans);

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Section 05 Progress Draw Report

Project Monitor’s Certificate

Verified cost in place based on the site visit and visual evaluation of the stage of

the project (Revolving loans);

Value of unutilized project contingency stated in dollars and in percentage of

cost to complete;

Value of current advance as per Secondary Cost to Complete Margin

Calculation and value of loan outstanding to date.

Financial Requirements

(i) Source of Funds – indicates any changes in financing program as they relate to

the current period such as:

Credit Facility No. 1 – Demand Loan, Non-Revolving

Lender’ Construction Mortgage $4,600,000

Borrower’s Land Equity 500,000

Borrower’s Cash Equity 600,000

Purchasers’ Deposits 800,000

Deferred GST on Closing 200,000

Total Source of Funds $6,700,000

Project Budget $6,700,000

Shortfall/Surplus $ 0

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PROJECT MONITORING – STUDY GUIDERevision No.3

Section 05 PROGRESS DRAW REPORT

Please note that since the borrower has reported $800,000 of purchasers’ deposits being

injected into the project, Credit Facility No. 1 has been reduced by the same amount this

reporting period to avoid budget surplus.

(ii) Current Advance and Margin Calculations – contains the following information:

Based on the review of invoice documentation a gross cost to date is $3,800,000, after

deduction of construction holdback totaling $400,000 the net cost to date is $3,400,000;

The site visit was made on February 20, 2012 to confirm work in place;

Verified value of the first lender’s advance $800,000

Stated calculated amount of the second advance using primary and secondary methods of

advance calculation;

(ii) Current Advance and Margin Calculations

Presented below are Primary and Secondary Margin Calculations carried for Non

Revolving Construction Loans:

PRIMARY MARGIN CALCULATION

Gross Cost to Date $3,800,000

Less, Holdback Retained 300,000

Less, Land Equity 500,000

Less, Cash Equity 600,000

Less, Deposits Released 800,000

Loan Ceiling $1,600,000

Less, Loan Outstanding 800,000

Current Advance $ 800,000

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Section 05 PROGRESS DRAW REPORT

SECONDARY MARGIN CALCULATION

Credit Facility No.1 $4,600,000

Total Budget $6,700,000

Less, Cost to Date 3,800,000

Less, Cost to Complete 2,900,000

Less, Holdback Retained 300,000

Add, HST on Closing 200,000

Loan Ceiling $1,600,000

Less, Loan Outstanding 800,000

Current Advance $ 800,000

Financial Requirements

Please note that the changes, which initially affected Source of Funds have flown to

the Margin Calculation Calculations (both Primary and Secondary). However none

of the changes should create the variance between calculated margins.

Please also note that Secondary – Cost to Complete Margin Calculation is much

more important from the lenders point of view since it directly relates value of Credit

Facility, stage of the construction (Cost to Complete) and value of work performed

during the reporting period.

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Section 05 Progress Draw Report

BUDGET REVIEW

(i) Project Budget Revisions Made This Period – includes detailed commentary of

the budget revisions. If any revisions occurred during the reporting period each

one has to be analyzed and reported to the lender for example:

The hard costs – construction budget has been increased this period to

include net amount of budget revisions to general requirement, metals,

wood and plastics, and project management fees.

The administration / marketing budget has been reduced this period to

reflect the net amount of budget revisions to sales office set up, office

operations and marketing.

(ii) General Notes and Comments - consists of reviews, analysis and comments on

the following documentation as they change during the reporting period such as:

Site Plan Control Agreement;

Agreement of Purchase and Sale of Land;

Government Permits and Consents;

Contracts;

Bonding;

Tarion (ONHWP) Certification;

Soil Reports – Geotechnical Investigation;

Phase I and Phase II – Environmental Site Assessments;

Noise Impact Assessment;

Traffic Impact Study;

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Section 05 Progress Draw Report

BUDGET REVIEW

(ii) General Notes and Comments

Land Survey;

Insurance;

Consultants’ Quality Control Reports – please note that for buildings of

certain size (Part 3), under the Ontario Building Code an Architect and

Professional Engineers of various disciplines must be retained to undertake

regular general reviews to determine if the building is constructed in general

conformity with the documents prepared by an Architect or Professional

Engineer that formed the basis for the issuance of the Building Permit.

Written reports of these reviews must be forwarded to the Chief Building

Official of the subject Municipality on a regular basis. Copies of these

reports have to be included in the Project Draw Reports as Appendices.

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PROJECT MONITORING – STUDY GUIDERevision No.3

Section 05 Progress Draw Report

BUDGET REVIEW

Suggested Questions Review Construction Budgeting by Frank W. Helyar, issued 2011,

Chapter 8 (pages 82-86)

Define differences between a budget review and progress draw

List major sections of a progress draw and explain their importance

Define scope and extent of disclosures in important notes

Define the extent of information carried on the project monitor’s certificate

Explain the concept of primary and secondary margin calculations

Define the extent of comments and notes in the detailed commentary of the project

budget

Explain the importance of the project contingency and method of assessing its

adequacy

Define the extent of general notes and comments in budget analysis

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PROJECT MONITORING – STUDY GUIDERevision No.3

Section 06 Practical Assignment Residential Condominium

Study Objectives Upon completion of this section the students should be able to:

List and explain importance of each phase of the preliminary work

Identify scope of the documentation required to complete each phase of the budget

review and progress draw

Set up source and use of funds based on information provided in the lender’s

commitment letter

Identify equity calculation and its importance

Identify each of the spreadsheets used in the report, explain their parts, sections

and relations

Identify concept of cost accruals and explain its importance

Assume that a cost consultant is engaged to perform his duties on a residential

condominium development. In order to complete a Budget Review and a Progress Draw

he should follow through the several phases:

1. Receive and review a commitment letter issued by the lender and singed by the

borrower:

a. Identify timing of the budget review and frequency of progress draws expected

by the borrower;

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There are six Excel spreadsheet reports, which included in the Budget Review such

as:

1. Margin Calculation

2. Capital Cost Summary

3. Construction Cost Summary

4. Cash Flow Calculation

5. Sales Summary

6. Sub - Contracts and Holdback Summary

All spreadsheets are part of one file. They are linked together to assure correctness and

completeness of information provided.

MARGIN CALCULATION - is the final report that links the project’s financial program

to the budget, cost to date and cost to complete. Margin Calculation is prepared for the

lenders overview and functions to control the adequacy of project cost to complete and

source of funds to complete. As shown it consists of four parts:

Source and Use of Funds – which represents a mathematical expression of conditions

stipulated in the lender’s commitment letter. It compares source of funds with the use of

funds (which is the project budget). (Q) What is source of funds? (A) It is a summary of:

Maximum value of loan available to the borrower,

Borrower’s equity injection required by the lender,

Amount of purchasers deposits collected by the borrower and available to be portion,

Occupancy income associated with the period when the purchasers have already

moved in to their suites but did not fully posses them (close the sale) and have to pay

rent for living – before official registration of the condominium.

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MARGIN CALCULATION (Continued)

All deferred charges – which are not due payable until the completion of the project

such as:

A portion of sales commissions (may be up to 50%),

A portion of development charges and municipal fees – as per

development agreement,

A portion of management fees,

A portion of legal fees on closing procedures,

A portion of landscaping costs,

Section 06 Practical Assignment Residential Condominium

Source and Use of Funds (Continued)SOURCE AND USE OF FUNDS     ABC Bank Facility No. 1 9,873,220.00 Borrower's Equity 2,100,000.00 Purchaser Deposits 2,026,780.00 ONHWP Deposits Released 1,243,200.00   Excess Deposits Released 783,580.00    2,026,780.00   TOTAL SOURCE OF FUNDS   14,000,000.00 PROJECT BUDGET 14,000,000.00 SURPLUS / (SHORTFALL)   - Check -

In this case the borrower was allowed to use not only Tarion (Ontario New Home

Warranty Plan -ONHWP) deposits ($20,000.00 per each unit sold) but also excess

deposits insured by (St. Paul Insurance Company) as a source of funds.

Project Budget value is a link and carried from the Capital Cost Summary (CCS)

spreadsheet.

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MARGIN CALCULATION (Continued)

Surplus / Shortfall) – nil value demonstrates the balance between the source of funds and

the project budget.

Check is a link, which assures the balance of Primary and Secondary Margin

Calculations.

Primary Loan Calculation – represents status of construction based on cost to date

position. This part is linked to the CCS spreadsheet and Source and Use of Funds part of

Margin Calculation.

Source and Use of Funds (Continued)PRIMARY LOAN CALCULATION   Gross Cost to Date 7,306,017.74 Less, Holdback Retained (191,387.55) Add, Holdback Released - Less, Borrower's Equity (2,100,000.00) Less, ONHWP Deposits Released (1,243,200.00) Less, Excess Deposits (783,580.00) LOAN CEILING   2,987,850.19 Less, Loan Balance - CURRENT ADVANCE 2,987,850.19

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MARGIN CALCULATION (Continued)

As shown: Gross Cost to Date and Holdback Retained values are linked to CCS,

Borrower’s Equity, Tarion (ONHWP) Deposits Release and Excess Deposits Released

are equal to the same in the previous table and subtracted from the net cost to complete.

The result is shown as Loan Ceiling, which represents amount of loan advance available

to the borrower based on its cost to date situation.

Loan balance nil value indicates the value of bank loan advanced in the prior period.

Secondary Loan Calculation – represents status of construction based on cost to

complete position. This part is also linked to the CCS spreadsheet and Source and

Use of Funds part of Margin Calculation.

SECONDARY LOAN CALCULATION ABC Bank Facility No. 1 9,873,220.00 Less, Gross Cost to Complete (6,693,982.26) Less, Holdback Retained (191,387.55) LOAN CEILING 2,987,850.19 Less, Loan Balance - CURRENT ADVANCE 2,987,850.19

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MARGIN CALCULATION (Continued)

Primary Loan Calculation (Continued)

As shown: ABC Bank Facility is linked to the Source and Use of Fund part, Gross Cost

to Complete and Holdback Retained are linked and carried from CCS.

The result is shown as Loan Ceiling, which represents amount of loan advance available

to the borrower based on its cost to date situation.

Loan balance nil value indicates the value of bank loan advanced in the prior period.

Finance Program – indicates the use of each source of funds as the project progresses

over time. It also correlates source of funds, cost to date and cost to complete data as

well as cost to complete for the sources of funds. It consists of:

Total Funds column which corresponds to the Source and Use of Funds,

Current Draw column, which shows project cash inflows received from all sources

during the current period. Please note that the amount of Current Advance available

from the loan facility calculated by the Primary and Secondary Methods equates to

the corresponding value in the Current Draw column. In addition it shows current

value of purchasers’ deposits released into the project. It is very important to

understand that the total of all sources of funds equates to the total of use of funds for

the period. Check No. 2 is used as a link from CCS to assure the accuracy of

calculation.

The same is true for the Previous Advance and Total Advance columns.

Cost to Complete column shows amounts of unutilized sources of funds and

compares their values with the Cost to Complete of the overall project drawn from

CCS.

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MARGIN CALCULATION (Continued)

As shown in the table below:

Total all sources of funds equates to the total project budget, which is confirmed

by Check Nos. 1 and 2.

As per budget review, the borrower has injected $2,100,000.00 as its cash equity

and released $2,026,780.00 as purchasers’ deposits in the project.

From the other hand, the borrower has incurred cost of the project totaling to

$7,114,630.19.

As a result the borrower is eligible for the advance from the loan facility

provided by the lender in the amount of $2,987,850.19. Please note that this

amount equates to Current advance calculated by the Primary and Secondary

Methods.

It is always very important to check that the project’s cost to date is adequate or

less then the same of the loan facility. It the opposite is true, it indicates that the

borrower does not have enough sources of funds to complete the project.

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FINANCING PROGRAM FUNDS CURRENT PREVIOUS TOTAL COST TO  DRAW ADVANCE ADVANCES COMPLETE ABC Bank Facility No. 1 9,873,220.00 2,987,850.19 - 2,987,850.19 6,885,369.81 Borrower's Equity 2,100,000.00 2,100,000.00 - 2,100,000.00 - Purchaser Deposits 2,026,780.00 2,026,780.00 - 2,026,780.00 - - - - - - - Totals 14,000,000.00 7,114,630.19 - 7,114,630.19 6,885,369.81 Check 1 14,000,000.00 7,114,630.19 - 7,114,630.19 6,885,369.81 Check 2 14,000,000.00 7,114,630.19 - 7,114,630.19 6,885,369.81

Variance - - - - -

-

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CAPITAL COST SUMMARY

Capital Cost Summary (CCS) is the most complicated spreadsheet among the reports. It

accommodates budgetary, cost, vendors and statistical groups (I) for each of nine project

categories (II).

(I) Budgetary Group

Borrower's Variance Previous Variance Mutual GainBudget Budget Budget

A C-A B C-B C

As shown: Borrower’s budget is entered in the column A as the borrower compiles it.

Then the Cost Consultant summarizes the final budget in the column C based on the

results of the budget review. The variance C-A is shown to outline the differences among

the categories. The Cost Consultant has to update the budget on a regular basis as the

project progress. It is very important to assure that the current budget in column C for

each category is equal or higher than the related category of cost to date or committed

costs value.

(I) Cost Group

% Amount Amount This Cost ToComplete To Date Previous Draw Complete

D/C D E D-E C-D

As shown: All cost incurred to date and drawn from the borrower’s cost report are

allocated in the column D. This provides information to the reader with respect to %

Complete as a ratio of the values D/C, This Draw as a variance between D and E and

Cost to Complete as a variance between C and D.

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CAPITAL COST SUMMARY

(I) Vendors Group

Holdback Holdback CommittedRetained Released Costs

F G H

As shown: Project Monitor must keep track on the holdback retained and holdback

released for each vendor involved in the project to report gross and net cost to the lender.

As discussed previously (See Margin Calculation), holdbacks retained by the borrower

are subtracted from gross cost to date as per Primary Method and from cost to complete

as per Secondary Method in order to calculate current advance. The holdback payment is

usually financed as a separate Progress Draw at the final stage of the project when

substantial completion is achieved. Committed Costs values represent the level or

percentage of executed sub- contracts to the overall budget (This will be discussed later).

Please note that Holdback Retained and Committed Costs values in the summary are

added on a project to date basis. In order to keep track on current changes of these items

for each vendor please see Sub - Contracts and Holdback Summary (Spreadsheet No. 6).

(I) Statistical Group

Cost Per Unit Gross Floor S.F. Net Floor S.F.132 148,613 134,093

I J K

As shown: Project Monitor should keep statistical data of actual cost of each element per

unit built, gross floor area (if any retail component is included) and net floor area (See

Sales Summary) in order to compare new projects with existing database and assure that

the budget used is reasonable.

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CAPITAL COST SUMMARY

(II) Hard Costs - Servicing

Public Roads Electrical Underground TOTAL SERVICING COSTS (2) Please note that in many cases this category is included in Hard Costs – Construction

Budget.

(II) Hard Costs - Construction

Construction – Divisions 1 - 16 Construction/Project Management TOTAL HARD COSTS – CONSTRUCTION (3)

Please note that the values in Construction – Divisions 1-16 are presented as a summary

of the Construction Costs spreadsheet, which is linked to CCS. Construction / Project

Management is usually incurred by the borrower, which has necessary expertise and

capability to conduct this activity. As we discussed early this cost may be deferred to the

completion of the project if required.

(II) Soft Costs - Development

Permits – Buildings Municipal Fees Condo Application Fees Town Engineering City Charges Region Charges Hydrant Charges Park Dedication School Board Levies Sidewalk School Board Payment Easement Water Meter Fees - Recovery Hydro Meter Fees TOTAL DEVELOPMENT (4)

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CAPITAL COST SUMMARY

As shown: the scope of charges and fees may vary therefore the project monitor should

clearly identify which charges are applicable to the particular project.

(II) Soft Costs - Consultants

Consultant – Architect Consultant – Designer Consultant – Planning Consultant – Fire Code Consultant - Site Servicing Consultant - Soil Consultant – Landscape Consultant – Surveyor Consultant – Structural Consultant – Mechanical Consultant – Noise Consultant – Traffic Consultant - Park Consultant – Technical Audit Consultant – Inspection and Testing Disbursement, Plan Printing Others TOTAL CONSULTANTS (5)

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CAPITAL COST SUMMARY

As shown: Please note that the scope of soft consultant involved may vary therefore the

project monitor should identify those consultants in a particular project. In some cases the

architect sub contract all other consultants and all payments are coordinated with him or

through his account.

(II) Administration / Marketing

St. Paul Guarantee Fees ONHWP Enrollment Fees ONHWP Fee Recovery ONHWP Registration ONHWP Legal Fees ONHWP Legal Fees Recovery Construction Bond Insurance Legal - Const. Financing Legal – Condo Documents and Closing Legal - Fees Recovery Legal – Others Sales – Commissions Sales – Commissions Recovery Sales - Office Set up Sales - Office Operations Marketing Media TOTAL ADMIN / MARKETING (6)

As shown: please note that St. Paul Guarantee Fees is a payment to insure excess

purchasers’ deposits and release them into the project as a source of funds. Often the

excess deposits may be released in a proportion to ONHWP deposits such as from 3 : 1 to

1 : 1. St. Paul Guarantee Margin Calculation is used in order to account for the amount of

excess deposits released into the project. This is beyond the scope of this program.

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CAPITAL COST SUMMARY

(II) Finance Charges

Project Monitor Occupancy Revenue Sundry Revenue Interest – Construction Loan Interest – Purchaser Deposits Commit. Fee - Const. Financing Letter of Credit Charges Bank Charges TOTAL FINANCE CHARGES (7)

As shown: Cost of Project Monitor is carried here since its services are retained by the

direct order of the lender. Occupancy Revenue is a credit balance in the budget. It

appears only in condominium development projects. It represent amount of cash

collected by the developer from the purchasers for the period of living in their suites

before the closing and registration of condominium. (Usually 1 – 2 month) Interest -

Construction Loan is calculated based on the Cash Flow (Spreadsheet No. 4) and will be

discussed below. Interest – Purchaser Deposits a credit item, which appear when the

lender requires the borrower to retain certain amount of deposits on the lenders account.

Commitment Fee – a lump sum payment usually charged by the lender on the initial stage

of loan processing. However in some cases it may be spread into two or three payments

with some of the even deferred to the end of the project. Quite often the lender issues

several Letters or Credit on behalf of the borrower to the municipal authorities. Interest

charges on the Letters of Credit are usually carried separately from those of interest on

construction loan. Miscellaneous bank charges are usually carried separately.

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(II) Contingency

Contingency TOTAL CONTINGENCY (8)

As shown: Contingency is carried as a lump sum in this section, however it can be spread

among hard costs, soft costs – consultants and project administration categories. Total

contingency should be kept at 5% level of the cost to complete. Presented below is a table

to calculate this value.

CAPITAL COST SUMMARY

Project Contingency Allowance

$469,647.00

Project Cost To Complete 6,693,982.26Less, Project Contingency -469,647.00

Net Cost to Complete 6693982.26

The following disclaimer is added:

The contingency as a percentage of the net cost to complete is 7.5%, which appears

adequate / reasonable to complete the project at this time.

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(II) HST

HST on Payables HST Credit HST on Revenue TOTAL HST (9)

There are could be two ways of treating HST on Payables and HST Credits:

HST is excluded from the financing program. In this situation all HST paid by the borrower

as well as all HST Credits received by the borrower are not included in cost to complete.

If HST paid by the borrower on its payables is financed from the loan facility, the project

monitor should include all HST Credits received by the borrower as a source of funds and

short amount of advance by the value of HST Credit received by the borrower.

HST on Revenue is a liability of a borrower, which intends to use the building it is

constructing for the future business. It is less applicable to a condominium development but

more to a retirement home construction when the developer-owner will operate the new

facility. In this situation the building, when completed should be assessed for its value and a

portion of HST is to be paid. This amount is expected to be higher than HST on Payables due

to added value created by the new construction.

All nine categories comprise TOTAL PROJECT (1-9) and carried to Cash Flow Calculation.

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CAPITAL COST SUMMARY

Summary Table - Reconciliation

Borrower's Total Cash Injected to Date 5,303,177.13 Add, XYZ Concrete 473,260.03 Add, Architect 2,825.00 Add, On-Site Services 163.58 Add, BBB Design Inc. 19,449.18 Add, III Inc. 39,810.42 Add, Labour Inc. 1,539.67 Add, Mini Ltd. 575.17 Add, Concrete Accessories 10,393.53 Add, New Homes 4,011.43 Add, Office Machines and Co. 288.53 Add, Curler Ltd. 55.44 Add, RRR Construction 1,197.60 Add, RGB Ltd. 1,889.75 Add, Construction Services 53,500.00 Add, Lockport Homes Ltd. 12,326.40 Add, Star Inc. 5,858.26 Add, Lnumar Ltd. 31,708.08 Add, Space Inc. 18,139.94 Add, Plumbing and Heating Ltd. 57,938.92 Add, Accrued Liabilities for Development Charges 715,292.68 Add, Holdback Retained 191,387.55

Less, Bank Balance (27,834.55)

Borrower's Costs to Date 6916953.74 Borrower's Cost to Date (Rounded) 7,306,017.74 Variance due to rounding 0.00

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CAPITAL COST SUMMARY

Summary Table – Reconciliation

As shown: Total Project cost is $7,306,017.74 (which equates to Margin Calculation).

This value consists of two parts:

Borrower’s total cash injected to Date in the amount of $5,303,177.13. This amount given as

a result of an equity review attempted by the Project Monitor prior to issuing the Budget

Review. It includes purchase of land; all land related costs, soft cost – consultants,

administration/marketing and finance costs already paid by the borrower.

Borrower’s accruals or current accounts payable. The borrower has already received services

from its vendors and issued cheques based on their invoices in the total amount of

$1,123,997.19. These are all eligible construction costs and they are allowed to be included in

the current advance. So, if the borrower pays to its vendors total of $1,123,997.19, which is

net of associated Holdback in the amount of $191,387.55 and to local authorities total of

$715,292.68 of accrued liabilities for development charges all drawn from the proceeds of the

current advance, its financial position (balance of $27,834.55) will remain the same.

Please note that the borrower is required to inject only $2,100,000.00 as per lender’s

commitment letter. Therefore the borrower has to be compensated for the excess of equity

injected into the project by the sum of purchasers’ deposits released and amount of current

advance calculated.

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CAPITAL COST SUMMARY

Construction Cost Summary is linked to CCS as a line item included in Hard Costs –

Construction Category (No. 2). It is formatted similar to CCS, with few differences:

Cost categories of Construction Cost Summary are in aligned with the Master Format and

comprised of 16 Divisions.

Each Divisional Cost Summary is broken down into details.

Vendors’ section is presented with more details incorporating the status of contract if it is

executed or if only a quote received providing name of a vendor in some cases.

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CONSTRUCTION COST SUMMARY

Summary Section

HARD COSTS Division 1-General Requirements Total Division 2-Site Construction Total Division 3-Concrete Total Division 4-Masonry Total Division 5-Metals Total Division 6-Wood & Plastics Total Division 7-Moisture Protection Total Division 8-Doors & Windows Total Division 9-Finishes Total Division 10-Specialties Total Division 11-Equipment Total Division 12-Furnishings Total Division 13-Special Construction Total Division 14-Conveying Systems Total Division 15-Mechanical Total Division 16-Electrical Total   TOTAL HARD COSTS Check

Divisional Breakdown

Division 3-Concrete Formwork, Concrete and Rebar Placing Reinforcing Steel Supply Concrete Supply Concrete Associated Costs Division 3-Concrete Total

Vendors’ Section

Contracts Quotes Committed Received Received Budget

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CASH FLOW

Cash flow is one of the most complicated spreadsheet prepared by the Project Monitor.

Its major goal is to confirm the lender with the adequacy of interest on construction loan

allowance incorporated into the budget. Cash flow usually consists of three parts:

Project budget and expenditures allocated over future periods.

BUDGET (PROJECT COSTS) Project Nov 02  Budget 1      TOTAL LAND COSTS (1) 1,421,614 1,421,614      TOTAL SERVICING COSTS (2) 794,000 655,700       TOTAL HARD COSTS - CONSTRUCTION (3) 7,717,701 1,882,238       TOTAL DEVELOPMENT (4) 1,350,170 1,130,413       TOTAL CONSULTANTS (5) 986,391 644,428       TOTAL ADMIN / MARKETING (6) 1,094,666 1,160,574      FINANCE CHARGES     Project Monitor 35,000 - Occupancy Revenue (581,091) - Interest – Construction Loan 535,000 - Interest - Purchaser Deposits 24,768 - Commit. Fee - Const. Financing 150,000 75,000 Letter of Credit Charges 20,000 14,792 Bank Charges 9,900 1,277      TOTAL FINANCE CHARGES (7) 179,694 77,186      TOTAL CONTINGENCY (8) 469,647 -      HST    HST on Payables - 189,329 HST Credit - (46,852)HST on Revenue - - TOTAL HST (9) - 142,477

TOTAL PROJECT ( 1 - 9 ) 14,000,000 7,114,630

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CASH FLOW

Project Budget

As shown:

The budget review was prepared in November 2002, however project had started before

that time.

As of November 2002 the borrower’s net cost to date was $7,114,630.19, which

corresponds to the CCS as Check No. 2 (see Margin Calculation / Finance Program)

and also corresponds to the result of subtraction of Holdback Retained $191,387.55

from Gross Cost to Date $7,306,017.74.

Land cost (1) was 100% completed by that time; servicing – development (2), hard costs

– construction (3), soft costs – development (4), administration/marketing (5) were

progressing at that time.

Please note that $1,123,997.19 of total accruals requested by the borrower (see CAPITAL

COST SUMMARY / Summary Table Reconciliation, amount of $1,010,656.67 was

allocated to hard costs – construction (3) and $53,500.00 to hard costs – management

(3), amount of $53,982.26 to soft costs – consultants (4), amount of $ 5,858.26 to

administration / marketing (6).

Please also note that amount of $715,292.68 was accrued and allocated to development

charges (5) as per borrower’s request.

Finance charge (7) category is broken down in details in order to trace interest on

construction loan value.

Commitment fee budgeted as of $150,000.00 was paid in two equal installments of

$75,000.00.

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CASH FLOW

Letter of credit interest was 74% utilized.

HST on payables was at $189,329.00 however an HST Credit was received in the

amount of $46,852.00, which made the borrower eligible to receive $142,477.00

from the proceeds of the current advance.

Project Revenue indicates timing and amount of cash inflows, which consist of

purchasers’ deposits and closing proceeds. Timing is based on Closing

summary schedule (see below)

ACCUMULATED EXPENDITURES 7,114,630 PROJECT REVENUE Equity - 2,100,000 Purchaser Deposits - 2,026,780 Gross Closing Proceeds (Net of GST) 19,339,204 TOTAL REVENUE 19,339,204 4,126,780ACCUMULATED REVENUE 4,126,780 ACCUMULATED DRAW 2,987,850 INTEREST RATE 5.50 PRIME RATE 4.50

As shown:

1. Borrower’s total revenue including purchasers’ deposits and closing proceeds is

expected at $19,339,204.00.

2. Borrower’s revenue at the time of budget review was $41,326,780.00, which consists

of cash equity injected into the project and purchasers’ deposits collected and then

released into the project.

3. The net of accumulated expenditures $7,117,630 (rounded) and revenue $4,126,780

(rounded) totals to $2,987,850 of accumulated draw, which is this case equals to the

current draw.

4. Interest rate of prime (4.5%) plus (1%) is applied to the loan amount to calculate the

total allowance for interest expense on construction loan.

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CASH FLOWClosing Summary indicates timing of unit’s sale which determines timing and

amount of purchasers’ deposits available to be released into the project and

timing of occupancy which determines values of occupancy revenue (see CCS /

Finance charges).

CLOSINGS SUMMARY (UNITS)          Sales Summary     Sales 132 66 Accumulated Sales   66       Occupancy Summary     Occupancies 132   Accumulated Occupancies   -       Closings     Closings 132  

Accumulated Closings   -

As shown:1. Total number of unit is 132.

2. By the time of budget review, 66 units have been sold. That generated $1,243,200.00

of ONHWP deposits and $783,580.00 excess deposits released into the project (see

Margin Calculation / Source and Use of Funds).

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CASH FLOWInformation provided by Sales summary could be divided into the following groups:

statistical, units’ price, deposits received and deposits availability.

Statistical data

Level Suite Saleable PriceNo. Area per Purchaser(s)

S.F. S.F.

1 E 102 1,082 222 FRANK SMITH1 E 103 700 251 PETER JONES1 E 104 800 250

SALES SUMMARY

As shown: Project Monitor should specify each suite’s location, number, saleable area

and cost per square foot of saleable area. It is also recommended to keep track of the

purchasers’ name to report if any bulk sales occurred when prohibited by the lender’s

commitment letter. Please note that suite No. 104 is unsold.

Suites’ price data

Purchase Price Additional GST GST NetSold Unsold Parking Rebate Purchase

Projections Purchased Price

164,900 11,048 (3,977) 157,829239,900 16,073 (5,786) 229,613175,900 11,785 (4,243) 168,358

199,900 13,393 (4,821) 191,328

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Suites’ price data

As shown: Selling price for suite No. 101 is $164,900.00. However this price includes

GST in the amount of $11,048.00 (which is 7% of Net Purchase Price) and GST Rebate

in the amount of $3,977.00(which is 36% of GST). So, when Net Purchase Price in the

amount of $157,829.00, GST and GST Rebate added the sum equates to Purchase Price.

Please note that although the suite No. 104 is not sold (Selling price of $199,000.00 is a

projection), calculation of its Selling and Net price is still made.

Deposits Received

Deposits Deposits Deposits toReceivable Received be ReceivedMin. 5%

- - -35,985 35,985 -8,800 8,800 -9,995 9,995

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Section 06 Practical Assignment Residential Condominium

SALES SUMMARY

As shown: Values in Deposits Receivable column are calculated as 5% of Sold Price

(including GST). This calculation is made for both sold and unsold units. Please note that

suite No. 101 belongs to the Condominium Corporation, therefore no deposits is

expected. A purchaser has paid much more than 5% of Minimum Deposits Receivable for

suite No. 102. A purchaser has paid exactly 5% of selling price $8,800.00 for suite No.

103. Suite No. 104 is not sold, therefore minimum deposit of $9,995.00 is still pending.

Deposits availability

ONHWP Excess Excess Available Available TotalDeposits Deposits Insured ONHWP Excess AvailableReceived Received Deposits Deposits Deposits Deposits

- - - - - -20,000 15,985 15,985 20,000 15,985 35,9858,800 - - 8,800 - 8,800- - - - - -

As shown: No deposits available for suite No. 101. For Suite No. 102 from the total of $

$35,985.00 a portion of $20,000.00 is insured by ONHWP, with the residual amount

being insured by St. Paul Guarantee Insurance Company. The amount of $15,985.00 is

treated as excess purchaser’s deposit. For suite No. 103 only $8,800.00 is paid which is

less than $20,000.00, therefore it is insured by ONHWP.

Sales and Revenue Summary

REVENUE CONDITIONS PRECEDENT NET** GROSS

SOLD 66 64 13,000,000 13,874,004 15,188,400UNSOLD 66 15,465,200Less, GST (1,314,396)

Total 132 13,874,004 29,339,204

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Section 06 Practical Assignment Residential Condominium

SALES SUMMARY

Sales and Revenue Summary

As shown: The borrower has achieved 66 sales, out of 132 total. This corresponds with

the same shown on the cash flow Closing summary. The borrower has reported the sales

generated $15,188,400.00 gross revenue. Please note that $15,465,200.00 is expected to

be generated by the remaining 66 unsold units.

Please also note that the borrower has met both conditions precedent set up in the

commitment letter such as: minimum sales – 64; minimum net revenue generated -

$13,000,000.00. In this case revenue was net of GST and purchaser’s deposits. Please

also note that $1,314,396.00 of GST applies for both sold and unsold units.

Deposits Summary

ONHWP DEPOSITS 1,243,200 ECDI DEPOSITS 783,580

 

TOTAL DEPOSITS RECEIVED 2,026,780

As shown: Total ONHWP deposit received and excess deposits collected and released

into the project correspond to those reported in the Source of Funds / Margin Calculation.

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Section 06 Practical Assignment Residential Condominium

Suggested Questions Review Construction Budgeting by Frank W. Helyar, issued 2011,

Chapter 8 (pages 72-76)

List and explain required procedures to complete

What information presented on margin calculation spreadsheet, explain where this

information is drawn and how it is used

Explain the concept of financing program calculation

Explain importance of each group of data on capital cost summary

List major budget divisions and describe what is included in each of them

Explain importance of each construction cost summary

Why is cash flow important for the budget review, how is information presented

there linked with capital cost summary and margin calculation

What information is presented on the sales summary, why is it important to keep

track of sale deposits received

Explain what information from the sales summary is linked with that on the capital

cost summary and margin calculation

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PROJECT MONITORING – STUDY GUIDERevision No. 3

Section 07 Practical Assignment – Single Family Housing Development

Study Objectives Upon completion of this section the students should be able to:

Identify specific issues related to a single family housing development

Learn the difference between margin calculation site servicing and single family

housing development component

Understand sales mix and single family housing budgets

Learn concept of work evaluation and work in place for construction cost

summary for a single family housing development

Identify each of the spreadsheets used in the report, explain their parts, sections

and relationship

Assume that a cost consultant is engaged to perform his duties on a residential condominium

development. In order to complete a Budget Review and a Progress Draw he should follow

through the several phases:

Receive and review a commitment letter issued by the lender and singed by the borrower:

b. Identify timing of the budget review and frequency of progress draws expected by the

borrower – please note that single family housing development requires less frequent

draws because of the revolving nature of the housing loan facility;

c. Identify conditions precedent associated with the first advance such as:

Value of borrower’s equity,

Project budgets for model houses, model mix schedule, project budget for site

servicing,

Confirmation that all development charges and municipal levies are included in the

budget and paid;

Evidence of Building Permit, Builders All Risk Insurance, Surveyor’s Certificate

Number of pre-sold houses and minimum sale price for each,

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Number of houses under construction and number of model homes under

construction at the same time,

Value of deposits collected and revenue generated by sales,

Percentage of committed costs (signed contracts with the vendors),

Confirmation that all environmental, soil and sound reports do not carry any

outstanding issues,

Legal survey is completed and does not have outstanding legal issues.

Request from the borrower documentation required to completing the Budget Review.

(See Section 3 for details)

As soon as the all required documentation is received compile the budget and discuss

it with the borrower.

Complete the equity review at the borrower’ office and make a site visit.

Issue the Budget Review.

We are now review in details phase 3 of this process – preparation of the project budget.

There are five Excel spreadsheet reports, which included in the Budget Review for Single

family housing development such as:

Margin Calculation – Site Services

Capital Cost Summary – Site Services

Construction and Sales Summary and Margin Calculation – Housing

Work in Progress - Housing

Cash Flow Calculation

Sub - Contracts and Holdback Summary

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Section 07 Practical Assignment – Single Family Housing Development

All spreadsheets are part of one file. They are linked together to assure correctness and

completeness of information provided.

It is very important to understand that the finance program for single family housing

development consist from more then one loan facility. Usually the lender provides:

Non – revolving loan facility assist with purchasing of a parcel of land,

Non – revolving loan facility to finance building required site services such as

roads, hydro, water, gas lines or to make connection to the existing lines and a

retaining wall if required,

Revolving loan facility to finance construction of the houses and model homes,

Letters of Credit for municipalities.

The lender also sets up the formulas to regulate repayments of non – revolving loans

(land and site servicing from the proceeds of the revolving loans – single family housing)

MARGIN CALCULATION – SITE SERVICES - is the final report which links the

project’s finance program to the budget site servicing, cost to date and cost to complete.

Margin Calculation – site servicing for single family housing development is prepared the

same way as for the condominium development. As shown it consists of four parts:

Source and Use of Funds – which represents a mathematical expression of

conditions stipulated in the lender’s commitment letter.

SOURCE AND USE OF FUNDS  DEF Credit Facility No. 1 1,700,000.00 DEF Credit Facility No. 2 2,072,000.00 Borrower's Equity 3,216,100.00 Equity - Land 1,835,000.00  Equity – Development 1,381,100.00  Equity on Account - Total Source of Funds   6,988,100.00 Project Budget 6,988,100.00 Funding Surplus / (Shortfall) -

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Section 07 Practical Assignment – Single Family Housing Development

MARGIN CALCULATION – SITE SERVICES

As shown, the lender has made available loan facility No. 1 in the amount

of$1,700,000.00 to finance the purchasing of land in addition to the borrower’s equity in

the amount of $1,835,000.00 as stipulated in the commitment letter. The same is true for

the land development or site servicing.

The total of lender’s loan facilities Nos. 1 & 2 and borrower’s cash equity equals to the

budget of land and site servicing.

Primary Loan Calculation – represents status of construction based on cost to

date position. This part is linked to the CCS spreadsheet and Source and Use of

Funds part of Margin Calculation.

PRIMARY MARGIN CALCULATIONBorrower's Gross Cost to Date 5,824,785.08Less Holdback Retained To Date (101,519.16)Add, Holdback Released To Date 53,834.14Less, Borrower's Equity (3,216,100.00)Less, Cash on Account -Loan Ceiling 2,561,000.06Less, Loan Outstanding (1,700,000.00)Current Advance 861,000.06Current Advance Rounded

As shown: Total borrower’s equity is subtracted from gross cost to date and net of

holdback retained in order to calculate loan ceiling. Please note that the amount of loan

outstanding at the time of budget review is usually zero, however here it represents the

value of lender’s loan facility No. 1 in the amount of $1,700,000.00.

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Section 07 Practical Assignment – Single Family Housing Development

MARGIN CALCULATION – SITE SERVICES

Secondary Loan Calculation – represents status of construction based on cost to

complete position. This part is also linked to the CCS spreadsheet and Source

and Use of Funds part of Margin Calculation.

SECONDARY MARGIN CALCULATIONDEF Credit Facility No. 1 1,700,000.00DEF Credit Facility No. 2 2,072,000.00Less, Borrower's Cost to Complete (1,163,314.92)Less, Holdback Retained To Date (101,519.16)Add, Holdback Released To Date 53,834.14Loan Ceiling   2,561,000.06Less, Loan Outstanding (1,700,000.00)Current Advance   861,000.06Current Advance Rounded

As shown: Total availability of lender’s facility Nos. 1 & 2 is reduced by the amount of

$1,700,000.00 already transferred to the borrower to assist with the purchasing of la.

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FINANCING PROGRAM FUNDS CURRENT PREVIOUS TOTAL COST TO  DRAW ADVANCE ADVANCES COMPLETEDEF Credit Facility No. 1 1,700,000.00 - 1,700,000.00 1,700,000.00 -

DEF Credit Facility No. 2 2,072,000.00 861,000.06Equity – Land 1,835,000.00 500.00 1,896,758.30 1,897,258.30 (62,258.30)Equity – Development 1,381,100.00 886,956.59 431,885.11 1,318,841.70 62,258.30Equity on Account - - - - -  Totals 6,988,100.00 1,748,456.65 4,028,643.41 5,777,100.06 1,210,999.94 Check 1 6,988,100.00 1,748,456.65 4,028,643.41 5,777,100.06 1,210,999.94 Check 2 6,988,100.00 1,748,456.65 4,028,643.41 5,777,100.06 1,210,999.94

Variance - per Budget Review - 0.00 (0.00) - -

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Section 07 Practical Assignment – Single Family Housing Development

MARGIN CALCULATION – SITE SERVICES

Financing Program

As shown: The current advance of $1,748,459.65 consists of the lender’s advance

calculated above in the amount of $861,000.06 which was financed by the loan facility

No. 2 – Site Servicing. In addition to this two advances are transferred from the

borrower: in amount of $500.00 to balance land equity portion and $431,885.11 to

balance site servicing portion and meet the lender’s equity requirement. Please note that

cost to complete for the loan facility No. 2 corresponds to the same shown on CCS,

which proves the adequacy of project budget and source of funds.

CAPITAL COST SUMMARY – SITE SERVICES

CCS – Site Services is carried similar to that of residential condominium development. It

also accommodates budgetary, cost, vendors and statistical groups (I) for each of nine

project categories (II). Please refer to section No. 7 / Capital Cost Summary.

CONSTRUCTION COSTS AND SALES SUMMARY – HOUSING

When beginning construction of a single housing development, the developer offers to

his potential customers a list of models available to choose from (usually 4-6). Each

model has pre calculated budget and selling price. However nobody can predict the final

model mix and therefore the final total housing budget.

In this situation the lender predetermines the maximum advance available to the

developer made on the average of the model mix budget and value of deposits received

by the developer.

Construction costs and sales summary – Housing consists of the several sections:

Lot summary;

Deposits summary;

Model budget;

Work in place & Advance Calculation.

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Section 07 Practical Assignment – Single Family Housing Development

CONSTRUCTION COSTS AND SALES SUMMARY – HOUSING

Lot Summary

        LOT SUMMARY    Unit/ Lot Permit Total List SellingLot Model No. Sq. Ft. Price Price

1 * Marquis A 3,100 563,0002 * Marquis A 3,100 563,0003 * Marquis A 3,100 563,0004 * Marquis A 3,100 563,0005 * Marquis A 3,100 563,0006 Princess A 02-006299 4,165 660,0007 * Marquis A 3,100 563,0008 * Marquis A 3,100 563,0009 * Marquis A 3,100 563,00010 Marquis B 02-006300 3,140 553,000

The following information is carried for each of 42 lots available for construction as shown:

The model’s name and total gross foundation area in square feet.

Building Permit No. as it is the lender condition – no building permit, no advance.

List price and selling (actual price)

From 10 houses listed only 2 (Prices A and Marquis B) are actually sold.

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Section 07 Practical Assignment – Single Family Housing Development

Lot Summary is also cross-referenced with the table provided in the report such as:

Model Type Lot Nos. Model Area, Sq. Ft.Tiara 2,140Shangrila 2,280Royale 2,940Marquis 10,11 3,140Chetau 3,265Contessa 3,398Dutches 23, 38(M) 3,800Cleopatra 41 3,748Empress 3,865Baroness 2,025Crown 2,681Prince 42 3,138Princess 6,16,24,25 4,165Duke 3,743Average 3,177 Sq. Ft.

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Section 07 Practical Assignment – Single Family Housing Development

CONSTRUCTION COSTS AND SALES SUMMARY – HOUSING

Lot Summary

As shown: in this case 14 models are offered to choose from and to build on 42 lots.

From all the models Marquis is chosen for lots Nos. 10 & 11, Duchess – for lots Nos. 23

& 38 as a model house, Cleopatra – on lot No. 41 and so on. Please note that Prices is the

most popular model so far. In addition to lot No. 6 as shown in the previous table, it is

chosen for lots Nos. 16, 24 & 25.

Deposits Summary – carries amount of deposits received and % of the selling price, as

well as date of the occupancy and closing.

Unit/ Lot Deposit Deposit Deposits to be ClosingLot Model % Received Received Date

A

1 * Marquis A 0%2 * Marquis A 0%3 * Marquis A 0%4 * Marquis A 0%5 * Marquis A 0%6 Princess A 12% 80,000 March 28, 20037 * Marquis A 0%8 * Marquis A 0%9 * Marquis A 0%10 Marquis B 14% 75,000 Feb 28, 2003

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Section 07 Practical Assignment – Single Family Housing Development

CONSTRUCTION COSTS AND SALES SUMMARY – HOUSING

Model Budget

          BUDGET    Unit/ Lot Maximum Hard Constr. Development Soft TotalLot Model Advance Budget Charges Costs Budget

B C D B+C+D

1 * Marquis A 253,489 205,321 8,252 29,204 242,7772 * Marquis A 253,489 205,321 8,252 29,204 242,7773 * Marquis A 253,489 205,321 8,252 29,204 242,7774 * Marquis A 253,489 205,321 8,252 29,204 242,7775 * Marquis A 253,489 205,321 8,252 29,204 242,7776 Princess A 253,489 243,046 8,252 29,204 280,5037 * Marquis A 253,489 205,321 8,252 29,204 242,7778 * Marquis A 253,489 205,321 8,252 29,204 242,7779 * Marquis A 253,489 205,321 8,252 29,204 242,77710 Marquis B 253,489 205,321 8,252 29,204 242,777

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Section 07 Practical Assignment – Single Family Housing Development

CONSTRUCTION COSTS AND SALES SUMMARY – HOUSING

Model Budget

As shown: The total maximum advance for each house stipulated by the lender in the

amount of $253,489.00. Hard costs construction budget is calculated independently for

each house based on actual quantities. Development charges budget is carried based on

the cost of building permit and education charges. All other development charges such as

regional and city charges are carried on by Site Servicing budget. Soft costs budget is

spread equally among all 42 units. The total cost is based on the sum of consultants’

management administration and finance budgets related directly to the housing

component of the project. Please note that similar budget items related to the servicing

component are carried by on CCS Site Servicing.

Work in Place

Work in place section is outlined similar to the budget section. In consists of hard cost in

place (WIP), development charges, soft cost and in addition to all above, holdback

retained column. Please note that all values in hard cost column are linked to another

spreadsheet called Work in Place Evaluation. Holdback retained is calculated as 10% of

work in place. Total of this section is reported net of holdback. Development charges are

entered as paid for particular lots such as Nos. 6 & 10. Soft costs are carried in % of

budget. As a rule of thumbs, 50% of soft cost is allocated when building permit is

received, 25% is added when hard costs construction is about 50% of budget and the last

quarter of soft costs is added towards completion of the house.

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Section 07 Practical Assignment – Single Family Housing Development

CONSTRUCTION COSTS AND SALES SUMMARY – HOUSING

Work in Place

        WORK IN PLACE      Unit/ Lot Hard Cost Constr. Holdback Development Soft TotalLot Model WIP Retained Charges Costs W.I.P.

E F G H E-F+G+H  

1 * Marquis A - - - - - 2 * Marquis A - - - - - 3 * Marquis A - - - - - 4 * Marquis A - - - - - 5 * Marquis A - - - - - 6 Princess A 29,431 2,943 8,252 14,602 49,342 7 * Marquis A - - - - - 8 * Marquis A - - - - - 9 * Marquis A - - - - - 10 Marquis B 18,716 1,872 8,252 14,602 39,699

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Section 07 Practical Assignment – Single Family Housing Development

CONSTRUCTION COSTS AND SALES SUMMARY – HOUSING

Advance Calculation

        ADVANCE CALCULATION  Unit/ Lot Previous Current TotalLot Model Advance Advance Advance

1 * Marquis A - - -2 * Marquis A - - -3 * Marquis A - - -4 * Marquis A - - -5 * Marquis A - - -6 Princess A - - -7 * Marquis A - - -8 * Marquis A - - -9 * Marquis A - - -10 Marquis B - - -

As shown: no advance is calculated for each of the houses because based on the

commitment letter, first $60,000.00 for each sold house and first $40,000.00 for each

model house in this project are considered as borrower’s equity contribution. Only a

portion of costs, which exceed those targets, is transferred by the lender to the borrower.

Please note that the lender in this case has limited the number of houses, which can be

constructed simultaneously by 10 for the sold and 2 for unsold.

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Section 07 Practical Assignment – Single Family Housing Development

CONSTRUCTION COSTS AND SALES SUMMARY – HOUSING

Construction Status

Construction Status 13 Lots

Models Under Construction 2 Lots

Sold Lots Not Under Construction 2 Lots

Sold Lots Under Construction 9 Lots

Unsold Lots Under Construction - Lots

Loan Availability

Loan Availability Summary

Maximum Construction Facility 3,680,000

Less, Holdback Liability (45,597)

Maximum Construction Loan 3,634,403

Net of Holdback

Less, Advances to Date Net of Holdback -

Less, Current Advance Net of Holdback -

Not advanced Loan Availability 3,634,403

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PROJECT MONITORING – STUDY GUIDERevision No. 2

Section 07 Practical Assignment – Single Family Housing Development

WORK IN PLACE VALUATION – HOUSING

Description Lot No. 1 % WIP Lot No. 2 % WIPBasement Windows 784.00 0% - 784.00 0% -Brick Work 30,415.00 0% - 30,415.00 0% -Carpentry-Rough 23,120.00 0% - 23,120.00 0% -Carpentry-Trim 6,518.00 0% - 6,518.00 0% -Caulking 800.00 0% - 800.00 0% -Disposal 1,500.00 0% - 1,500.00 0% -Drain-Conc 6,485.00 0% - 6,485.00 0% -Drywall 16,779.00 0% - 16,779.00 0% -Electrical 3,970.00 0% - 3,970.00 0% -Excavation 2,500.00 0% - 2,500.00 0% -Fill-off-Site 5,000.00 0% - 5,000.00 0% -Fire Place 1,600.00 0% - 1,600.00 0% -Forming 10,400.00 0% - 10,400.00 0% -Garage-Doors 2,000.00 0% - 2,000.00 0% -Hardwood 6,571.20 0% - 6,571.20 0% -Heating 4,150.00 0% - 4,150.00 0% -Hydro-Under Ground 150.00 0% - 150.00 0% -Kitchen Cabinets 5,565.00 0% - 5,565.00 0% -Landscape 2,000.00 0% - 2,000.00 0% -Lumber 17,920.44 0% - 17,920.44 0% -Lumber-Rough 1,260.00 0% - 1,260.00 0% -Mirror 161.87 0% - 161.87 0% -Paint 4,185.00 0% - 4,185.00 0% -Patio-Deck 605.00 0% - 605.00 0% -Plumbing 4,895.00 0% - 4,895.00 0% -Railings 2,153.00 0% - 2,153.00 0% -Roof-Shingles 4,575.00 0% - 4,575.00 0% -Shower Door 830.00 0% - 830.00 0% -Stairs 5,000.00 0% - 5,000.00 0% -Stone 1,000.00 0% - 1,000.00 0% -Soffit -D- Pipe 2,146.00 0% - 2,146.00 0% -Steel 3,019.00 0% - 3,019.00 0% -Survey 1,000.00 0% - 1,000.00 0% -Tile 4,640.00 0% - 4,640.00 0% -Trailer-Construction 50.00 0% - 50.00 0% -Tree-Plant 0.00 0% - 0.00 0% -Trusses-Roof 4,450.00 0% - 4,450.00 0% -Windows\Doors 8,723.16 0% - 8,723.16 0% -Window Instal 400.00 0% - 400.00 0% -Labour 4,000.00 0% - 4,000.00 0% -Supervisor 4,000.00 0% - 4,000.00 0% -

- -205,321 - 205,321 -

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Section 07 Practical Assignment – Single Family Housing Development

WORK IN PLACE VALUATION – HOUSING

Work in Place Valuation is a source of information for the WIP Section of the

Construction Costs and Sales Summary – Housing. When asked to calculate an advance,

a project monitor assigns percentages of completion for each category in WIP of each of

the houses under construction. Then percentages are converted to the dollar values and

applied against the budgets of each of the houses. Please note that totals in WIP for lot

Nos. 1 & 2 correspond to the appropriate values in the section BUDGET, for lots Nos. 1

& 2. Work in place zero is also linked between two tables.

The major difference between Servicing and Housing portion of the project is that the

Servicing cost based on invoices and actual costs incurred to date, rather then Hosing

costs are based on the visual evaluation of status of the project at the time of project

monitors’ visit.

In all other aspects, such as Cash Flow and Sub – Contracts summaries, calculation is

similar to that for condominium development with one exception: single family housing

development is less predictable and more dependent on the status of sales.

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Section 07 Practical Assignment – Single Family Housing Development

Suggested Questions Review Construction Budgeting by Frank W. Helyar, issued 2011,

Chapter 8 (pages 82-86)

Identify conditions precedent associated with single family housing development

Why is site servicing treated separately from single family housing component

What information is carried on the lot summary

Explain importance of each group of data on capital cost summary

What comprises the home model budget

Define the concept of work in place and method of its evaluation

Define the concept of maximum loan availability

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PROJECT MONITORING – STUDY GUIDERevision No. 2

References

1. Examining the Strategic Relationship between the Project Manager and Project Loan Monitor,

prepared by Robert T. Myles, president of Hanscomb Loan Monitoring Inc. issued June 1,

1999;

2. Construction Budgeting, by Frank W. Heylar, issued 2011

3. Essential Aspects of Project Risk Management, by J. Knott, issued November 2003;

4. Sources of International Cost Data and Location Cost Modeling, by C. Fleming, issued

September 2003.

103


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