How do you compute IRR without any negative cash flows?
I've been working on this modeling exercise in excel for a real estate development. There is an initial construction loan, and initial cash outflow from the land purchase, but the problem is that the construction costs are supposed to me amortized evenly over 12 months. So you have all this cash coming in immediately from the loan (in excess of the amount being spend on just the land and first month of construction), such that the period 1 cash flow is positive. But the IRR formula doesn't work if you don't have at least one negative cash flow value.
What should I do? Should I spread out the disbursement of the loan funding over 12 months as well? If I did it exactly evenly, it wouldn't cover the land purchase in the first month. So what if I subtracted the land value from the total loan, and then disbursed the remaining money of that loan over 12 months? So say the loan is for 4.5m and the land is 3m. You'd initially receive 3m + 1.5m/12, and then 1.5m/12 for the next 11 months.
Does that make any kind of sense?
Thanks for any help
You don't generally receive CL proceeds in a lump sum. Your CL will also generally not reimburse you for your land purchase. Even if it does the cash likely went out the door prior to receiving the loan proceeds.
Bank will occasionally allow you to step up your land cost to value for loan sizing, but I would assume it's at cost. You typically fund all of the equity first before the lender puts in any money, so construction loan proceeds would cover the last $X of your costs.
Overly simple example: You buy land for $100. That will generally come exclusively from equity (negative cash flow). If you have $400 of additional construction costs, the bank may lend you $250 (50% LTC). The first $250 comes from equity - so the land purchase and the first $150 of construction costs are negative CFs. The remaining $250 comes from the construction loan (net $0 CFs as the loan is funded).