Part 4 - The trade-off between development feasibility software and spreadsheets

The perils of spreadsheets

Most property developers don’t want to admit that they still rely on spreadsheet templates with complex calculations to understand their financial feasibility. But we know almost one in five large businesses have suffered financial losses due to errors in spreadsheets. Here are just a few horror stories:

• TransAlta: A cut and paste error in a spreadsheet caused Canada’s largest clean electricity provider to buy more power contracts at a higher price. The cost of the mistake? $24 million.

• Fidelity: The company’s Magellan fund was forced to cancel a dividend distribution thanks to a missing negative sign. A loss became a gain, causing the dividend estimate to be off by $2.6 billion.

• JP Morgan: Copying and pasting a long list of cells led the investment bank to severely underestimate the downside of its synthetic credit portfolio. The bank eventually copped $6.5 billion in losses and fines

• Fannie Mae: While changing its accounting system, the company’s finance team relied on spreadsheets for calculations. But the spreadsheets contained errors that skewed results by over $1.1 billion, which was later reported to angry shareholders as “honest mistakes made in a spreadsheet”.

What does this mean for property developers?

A property development feasibility spreadsheet template can look surprisingly sophisticated, but they are far from foolproof. There are four main sources of error when property developers rely on spreadsheets. These are:

Manual errors: Development companies are often high-octane environments where appraisers are required to undertake complex work and make quick decisions in very short timeframes. This makes human error the most common cause of errors in feasibility studies and templates.

• Failure to audit: Sometimes, changes made in one section of a spreadsheet can have downstream impacts that are not easily understood. Auditing can eliminate some errors from spreadsheets, but following the audit trail and checking the mechanics of calculations can be a long and laborious task.

• Missing modifications: Development projects are not static, and most will require multiple changes from the initial appraisal. Many assumptions may need to be tweaked before work starts on site – and just one forgotten number can make a world of difference to your project profit.

• History repeats: It makes sense to replicate a spreadsheet feasibility study when considerable time and effort has already been invested in previous projects. But this can perpetuate errors from earlier projects. Can you be sure the last feasibility model was audited and error-free?

Continue reading the next instalment: Property development feasibility series part 5 – Property development finance - How to secure funding for your project

​Set your development feasibility up for success with ARGUS EstateMaster

To uncover deeper details about your project, you’ll need to depend on sophisticated software, like ARGUS EstateMaster. With a robust solution, you’ll be able to input more data to build a more accurate real estate feasibility study, allowing you to make confident financial decisions.

Once you input your costs and revenues, you can calculate key performance indicators, including residual land value, development margin and profit, net present value and internal rate of return to help you evaluate development opportunities.