Economics of the Project

Attention of potential investors! In the present section of the business plan you may find the results of the scientific-methodical calculations made by experts by request of the Initiator of the Project. This information is provided as an additional illustration of hopeful prospects of the Project. The calculations were made in the beginning of 2010, that`s why certain figures demand specification. However it doesn't influence the general conclusions of the section.

For the cost-effectiveness analysis of the construction of a multipurpose retail and office complex the financial-economic model was worked out. The model allows defining the basic financial-economic indicators of the Project and the period of recoupment for various initial values depending on the set of factors which influence the performance measures of the complex.

The basis of the Model is the matrix of the initial values containing about 300 various parameters, such as the total area of the retail and office complex, floor-by-floor structure of the spaces, potential loading, rental and selling prices of the spaces, heating and electrical supply expenses, watching charges, advertizing costs, interest payments to the Bank, rental payments for the territory.

The major reporting forecasting tables of the Project, which are necessary for financial -economic estimation, are based on this matrix:

• Statement of profit and loss,

• Statement of cash flow,

• The balance,

All of these tables are presented in the Appendixes 2-4.

The financial-economic model allows both to the Company (Initiator and Organizer of the Project), and to potential investors (banks, investment companies, funds, or potential private investors) not only to evaluate attractiveness of the Project by means of estimating indicators, but also to receive various scenarios of business development when changing a rather big spectrum of input parameters, to perform actual monitoring, and also to accept managerial decisions (or to participate in acceptance) during the term of validity of the Project.

Considering the difference between currencies at definition of profitable and expense parts of the Project, the Model allows to carry out all necessary multi-currency calculations. So, initial values of the supposed operational costs are based on ruble tariffs and rental incomes – on Euro as the office premises market is mostly Euro-based.

As the experience shows, many potential investors consider projects in the context of euro equivalent, that`s why all the reporting forms of the business plan were calculated in this currency.

The Project Model takes as a premise that inflation influences incomes and expenses equally. Due to this fact, all the calculations are made in fixed prices. However, if it is necessary, the model can be transformed into "inflationary-dependent" one (initial values are made with everything-changes-on-the-right principle), so that one can see the influence of change in prices on a certain group of values.

The revenue structure includes:

• earnings from space letting;

• earnings from space selling;

• other earnings.

In the model earnings from space letting may vary depending on percent of loading of the complex. "Fast" and "smooth" exit scenarios, i.e. by sale of the constructed spaces (or their parts) are also calculated.

The spending pattern includes:

• Operational expenses of the complex and adjoining territories;

• Management expenses;

• Miscellaneous expenses (including interests on the potential bank credit).

Operational expenses of the retail and office complex are based on the existing tariffs of municipal and other services in the town of Balashikha of the Moscow Region, and on the calculations made for similar projects. Base rates have been accepted as follows:

· Heating – 0.30 Euros for 1 sq. m;

· Water supply is calculated from the daily expense of water 0,0054 cubic m/sq. m. and the payment rate of 0,20 Euros for 1 cubic m;

· Sewerage – from the water consumption of 0,0054 cubic m/sq. m and the payment rate of 0,19 Euros for 1 cubic m;

· Electrical supply is calculated from the electric power consumption of 0,0561 kW /sq. m and the payment rate of 0,4 Euros/kW.H;

· Communication services are calculated from planned amount of staff working in the complex (at the rate of four person per one phone and a rent payment 5 Euro/months for phone);

· Garbage disposal - from the size of a garbage container of 0,8 cubic meter and the payment rate of 5 Euros /cubic meter;

· All-in one cleaning of the premise proceeding from the monthly payment rate of 0,25 Euros / sq. m and the total area of the building;

· Cleaning of adjoining territories is calculated proceeding from the total area of the territory and the payment rate of 0,5 Euros /sq. m;

· Windows and faces cleaning - proceeding from the total area of the front face and from the payment rate of 3 Euros /sq. m;

· Cost of security services is calculated proceeding from prices for services of security guards;

· Labor compensation fund –from the planned staff schedule;

The basis for drafting the budget forecast of management expenses is as follows:

Lease of land is calculated proceeding from the quarterly rent payment amounting to 5 531 Euros for two sites for the period of construction, and corrected on scale-up factor of 4 since the beginning of the complex start-up (since 28th month of realization of the Project);

Labor compensation fund (management allowances, expenses for accounting Department, Department of technical support, Department of rent and drivers) is calculated proceeding from the planned staff schedule;

Advertizing expenses proceeding from 5 thousand euro a month;

Audit and consulting services, transport expenses – at presupposed rates;

Bank commissions – at level of 0,05 % from prospective payments;

Interest payments for the credit – proceeding from the annual rate of 1%.

The given basic standards for the Project allow to predict quantity indicators of profitable and account parts of the Project and to see their influence on an overall picture of the business realization.

For determination of influence of tax treatments and credit payments on the Project, investment, tax and financial blocks were formed in the Model.

A planning interval of the financial-economic model makes one month that allows to distribute the budget of the Project in time more particularly and to respond to possible changes promptly, with further "checking" of various scenarios.

The Project financing scheme supposes that Investor establishes total credit limit for the Company, within the framework of which the intended use of financial resources proceeds. All free cash flow goes first of all on credit repayments, and after that – on return to shareholders of their investments which amount to 15 % from the Project (as a rule, it is quite enough for attracting investments in accordance with the international standards).

An entire duration of the Project review (or its «life term») under the given Business plan is 96 months (8 years) from the moment of the first investments. This term is sufficient for estimation of the Project and calculation of various variants development scenarios.

The calculation of the financial plan of the Project was done proceeding from the supposed parameters of the model and allows estimating rental incomes and profits earn on the financial strategy.

The multipurpose trading-office center will be put into operation on the 28th month of the Project realization, after the finish date of an "investment" stage.

Within the first eight months the percent of office spaces loading will be up at the level of 70 (the advertizing company is supposed to start half a year before opening). After that period Project strategy provides increase of loading and achievement of planned level of loading of 98 %.

Taking into consideration preliminary arrangements existing at present time and the big interest in placing a car dealership and a car-care center in the retail and office complex, and also a prospective high demand of a panoramic floor, the loading of these premises is supposed to be full from the very beginning.

As a result the general planned square of tenements under the Project will amount to 15,7 thousand sq.m.

Planned rental rates may vary from 210 to 480 Euros a year for square meter. In the considered basic model the following rates are accepted:

• For a car dealership, a car-care center and an auto parts shop – 300 Euros for 1 sq.m.;

• For catering facilities – 250 Euros;

• For office areas (from 3th to 4th floors) - 480 Euros;

• For prestigious 5th floor - 500 euro.

Monthly rental price of a parking slot is 100 Euros.

In the process of the Project realization the tenancy income increases and reaches the sum of 534 thousand euro by the fourth year.

As a result, at given parameters of prices, loading probability and realization of the planned investments and actions the annual receipts exclusive of VAT will make about 5,4 million euro.

Budgeted revenue under the Project is summarized in the Table № 4.

The expense side of the Project represents a classical cost structure of a business center.

Estimation of operational expenses takes into account all the expenses connected with the maintenance of the building and the adjoining territory. The monthly sum of these expenses totals from 63 thousand to 98 thousand euro and consists of the following cost items:

· Heating – 8 423 Euros;

· Water supply – from 531 to 548 Euros;

· Sewerage – from 581 to 600 Euros;

· Electric supply – from 14 125 to 14 596 Euros;

· Communication services – 2 430 Euros;

· Garbage disposal – from 1 347 to 1 392 Euros;

· All-in one cleaning of the premise – 257 625 Euros;

· Cleaning of adjoining territories – 5 005 Euros;

· Windows and faces cleaning – 20 836 Euros (to be carried out every 6 months);

· Object protection – 11 412 Euros;

· Staff salaries – 4 000 Euros;

· Consumable materials for exploitation – 2 000 Euros;

· Planned expenses on operating repairs – 844 Euros (since 48th month of the Project realization);

· Miscellaneous costs – from 1 700 to 2 325 Euros.

It should be noted that almost all maintenance costs are regular.

Management expenses are provided from 1st month and account for 7 560 Euros monthly (labor compensation fund of management board). From the 22nd month management expenses grow at the cost of advertizing expenses (5,000 Euros a month). And from the date of complex` input into operation (28th month) and till the end of the Project consideration the monthly sum of the expenses will be within the bounds of 23 706 to 62 524 Euros, reaching its maximum value in the months of land lease payments quarter sum of which totals 38 818 Euros. In addition, the structure of management expenses involves:

• Staff salaries, except management – 9 324 Euros;

• Expenses for audit services – 300 Euros;

• Expenses for consulting services – 300 Euros;

• Transport expenses – 1 000 Euros;

• Insurance;

• Banking commission – from 222 to 267 Euros.

Annual expenses for the retail and office centre during all period of consideration of the Project are summarized in Table 4.

Table 4. Budgeted revenues and costs of the Project, in Euro (exclusive of VAT).

The assessment of the efficiency of the Project is based on the calculation of the fundamental forecast models defining development:

1. Statement of profit and loss, which shows operational activities for the period of the Project consideration;

2. Cash flow statement, which indicates sources and terms of repayment of credits and loans of shareholders;

3. The balance, which reflects planned asset profile and liability structure of the Company.

Basing on these report forms, the assessment of the efficiency of investments and of a solvency of the Project was conducted.

The assessment of the efficiency of investments is based on the comparison of net profit expected from the realization of the Project with the invested capital. The basis for the method is the estimation of net cash flow defined as the difference between a net profit of the Project and the general sum of the investments and payments for credits (loans), connected with the of capital costs outlay.

On the basis of net cash flow the major indicators of the assessment of the efficiency of investments are calculated: net present value, discounted payback period, internal profitability rate, etc. (see Table 5).

The discount rate, which is used for matching expenses and revenues for each accounting period of the Project by the initial period, is applied to estimate these indicators.

Table 5. Assessment of the efficiency of investments and of Project solvency.

The figures above show that the period of recoupment of the Project (repayment of the credit) is 84 months from the beginning of realization of the Project and 57 months from the moment of input of the building into operation. Net Present Value for 96 months of operation of the retail and office complex will amount to 3,2 million Euro.

The break-even point on the total area of rent out premises starts from 10 thousand sq.m. at the first stage (the Project provides tenancy of 13 thousand in sq.m.) and comes to 4 thousand sq.m. on the fifth year of operation of the complex (the Project provides 15 thousand sq.m.).

Therefore, the minimum average rental price of a square meter in a year should be 297 Euros at the first stage (according to the Project – 396) and 130 Euros (according to the Project – 408) after loan repayment. It attests to certain degree of safety of the Project.

Project implementation period is supposed to be 8 years. Various business scenarios were considered and the key indicators of investments efficiency and of a financial status of the Project were calculated on the basis of these terms.

Calculation of the key indicators of the Project allows making a conclusion on a sufficient overall performance of the retail and office complex, and consolidated forecast forms of reports (see Appendixes) show an ability to fulfill obligations to the Bank and shareholders.

Detailed elaboration of the initial data and possibility of their change allow making a detailed and objective prediction of course of the events. Possible scenarios of course of the events (term of recoupment of the Project, term of payback of investments for potential investors) was worked out on the basis of this prediction (see Table 8). In addition, sensibility analysis was conducted (see Table 6).

Table 6. Project sensibility

The sensibility analysis was conducted by means of determining influence of changes of such indicators, as the discount rate, planned loading probability of the rent of office premises, rental cost of a square meter of office spaces and level of the interest rate of the credit.

The economic model which is being applied is flexible enough and allows estimating various scenarios of course of the events. It was interesting to analyze terms of recoupment of the Project while working it out (final date for return of credit resources and shareholders` loans is presupposed). The terms of recoupment depend on the number of major factors – such as percent of loading of leased office premises and prices for rent (see Table 7).

Table 7. Terms of credit repayment depending on the rental cost of a sq.m of office premises and probabilities of their loading (in month, in brackets - since placed in service).

The analysis of possible scenarios of course of the events shows that average terms of recoupment of the Project of outlay are within the range of 76 to 94 months from the beginning of realization and from 49 to 67 months from the moment of complex placing in service.

Dynamics of a balance sheet statement of the Company for 1st - 8th years of the Project realization is presented in Table 8.

Date: 2016-01-14; view: 741