Peak funding is the highest point of cumulative cost plus rolled-up interest less sales receipts, and on a phased scheme it is set by when sales start, not by how much the scheme costs.
Peak funding is the highest point reached by cumulative costs plus rolled-up interest, less sales receipts, on a monthly cash flow of the scheme. On an illustrative 40-home scheme costing 23,020,000 before finance, with 6,000,000 of equity going in first and debt at 8 per cent, peak funding is 17,608,133 in month 17, 76.5 per cent of cost, and the debt is repaid by month 26. If no home sells before completion the peak rises to 24,000,127.
Worked in full in The Real Estate Development Manager by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A summary appraisal states total cost and a finance line, and implicitly treats the whole cost as outstanding at once. A lender, a funding partner and the developer's own treasury need something else: the most money the scheme will ever need at one time, when it is reached, and how long it is held. Those three numbers decide the facility limit, the equity commitment and how exposed the scheme is to a delay. They only come out of a cash flow laid out month by month.
| Input | Value |
|---|---|
| Land, paid at month 0 | 5,000,000 |
| Acquisition costs (6.8%) | 340,000 |
| Pre-construction fees, months 1 to 6 | 400,000 |
| Build cost, months 7 to 24 on an S-curve | 16,000,000 |
| Professional fees during the build (8%) | 1,280,000 |
| Total cost before finance | 23,020,000 |
| Homes; price each; sales costs | 40; 750,000; 2% |
| First completions and sales; pace | month 18; 3 a month |
| Equity, spent first | 6,000,000 |
| Debt rate, interest rolled up monthly | 8% |
The S-curve puts 0.76 per cent of the build into the first and last months and 8.68 per cent into the busiest. Sales receipts go straight to repaying the debt until it is cleared.
1. Lay out costs by month: 5,340,000 at month 0, the fees over months 1 to 6, build plus fees on the S-curve over months 7 to 24.
2. Spend equity first: the 6,000,000 runs out in month 8, the second month of the build.
3. Each month thereafter: debt balance = opening balance × (1 + 8% / 12) + that month's cost − that month's net sales receipts.
4. Funding outstanding = equity spent + debt balance. Sales of 3 homes from month 18 bring in 2,205,000 a month net, more than the build is spending by then, so the balance turns down.
5. The maximum of the funding row is 17,608,133 at month 17: 6,000,000 of equity and 11,608,133 of debt.
Excel: =MAX(FundingRow) for the peak and =MATCH(MAX(FundingRow),FundingRow,0)-1 for its month.
The peak sits one month before the first sale, not at practical completion, because on a phased scheme the receipts start while the build is still running. Funding stays within 80 per cent of the peak for 6 months; the debt is clear by month 26, the last home sells in month 31, and total interest is 683,414.
| Case | Peak funding | Month | Change | Debt repaid | Interest |
|---|---|---|---|---|---|
| Base | 17,608,133 | 17 | 0 | 26 | 683,414 |
| Sales 2 a month | 17,608,133 | 17 | 0 | 30 | 928,839 |
| First sale month 22 | 22,499,283 | 21 | +4,891,150 | 30 | 1,174,724 |
| No sales until completion, then 4 a month | 24,000,127 | 24 | +6,391,994 | 31 | 1,420,917 |
| Build cost +10% | 18,796,548 | 17 | +1,188,416 | 26 | 808,810 |
| Half the land deferred to month 12 | 17,570,579 | 17 | −37,554 | 26 | 643,546 |
| Debt rate 10% | 17,677,648 | 17 | +69,515 | 26 | 865,619 |
The table separates two kinds of risk. The date of the first sale sets the peak: four months' slippage adds 4,891,150, more than four times what a 10 per cent build overrun adds. The sales pace, once sales have started, does not touch the peak at all; it lengthens the time the money is out and adds 245,425 of interest. A deferred land payment barely helps here, because it falls due before the peak and is funded anyway.
The flats case is the useful benchmark. Where nothing can be sold until the whole building is complete, peak funding exceeds the cost before finance, because the interest rolled up during the build has to be funded too. Phasing is worth 6,391,994 of peak funding on this scheme.
A quarterly cash flow with the peak funding requirement, how long it is held and what a delay costs is in the free workbooks for this case; the finance cost on the same kind of monthly cash flow is worked in how to calculate interest on a development loan.
Peak funding is all the money in the scheme at its high point, equity plus debt including rolled-up interest; peak debt is the lender's share. With 6,000,000 of equity going in first, the illustrative scheme's peak funding of 17,608,133 is 11,608,133 of debt, which is the figure the facility limit has to cover.
Often not, because the peak is reached before the first sale. In the illustrative case cutting sales from 3 to 2 homes a month leaves the 17,608,133 peak unchanged but keeps debt outstanding until month 30 instead of 26 and adds 245,425 of interest. Delaying the first sale by four months instead adds 4,891,150 to the peak.
Because rolled-up interest is funded too. If nothing is sold before completion, the illustrative scheme needs 24,000,127 at its peak against 23,020,000 of cost before finance, the difference being interest accrued on the debt during the build.
This article is one calculation from The Real Estate Development Manager. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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