Concomitantly with the final market feasibility study, the developer should work with the engineering firm to finish the final working drawings for the proposed subdivision development. This would include final engineering drawings for the roads, exact legal descriptions of each lot, the plating and staking of the lots, as well as any engineering drawings regarding earth moving, and utility layouts. These final plans and specifications should be coordinated with the construction contractor and the appropriate utility companies. Once the final market study and the final construction working plans and specifications are completed, the developer can close the development loan, acquire the property, and begin construction of the roads, utilities, and lots. Cost Estimates Cost estimates are categorized as direct and indirect costs.
Direct costs are land acquisition costs, engineering costs, construction costs, and marketing costs.
Indirect costs include professional fees for market feasibility analysis and appraisal, legal and accounting fees, and financing costs. A Discounted Cash Flow analysis should be completed to calculate the present values of the cash outflows and the present values of the cash inflows for financial purposes. An example of a Discounted Cash Flow analysis for a residential subdivision appears below. Under these assumptions, the residential development example appears to be quite attractive. The primary risk in developing a residential subdivision is the marketing risk, or the risk of selling six lots per quarter at the average price per lot.