7. The Economics of the Business


Contents

7.1 Economics of One Unit
7.2 Scalability and Sustainability
7.3 Fixed, Variable, and Semi-Variable Costs
7.4 Months to Breakeven and Positive Cash Flow

7.1 Economics of One Unit

Bay Area Community Builders will employ economic strategies that are beneficial and profitable for clients while ensuring organizational self-sufficiency through a fee-for-service model. The company will focus on the low-income, but equity-rich elderly population whose current income may be no more than Social Security. Benefits for the homeowner will include an income stream made by tenant payments. Even with property operating and management fees, our client will receive a significant net income.

The following "Owner-Based Loan Model" details the expenses and fees required for a one-unit project with no grants secured to subsidize construction and development costs. The homeowner will secure a loan to fund the construction and installation of a second unit dwelling and pays off the loan over a period of 15 years. Additionally, the homeowner will pay a developer fee to Bay Area Community Builders for the management and maintenance services provided throughout the lifetime of the second unit. During this time frame, the homeowner will receive a monthly income, whether the tenant is in the low or very-low income bracket, and whether the senior chooses to lease the main house or the second unit.

Life Cycle of One Unit

7.2 Scalability and Sustainability

Bay Area Community Builders' funds will be drawn from fees that will grow as we expand the number of projects. With increasing financial security and organizational credibility, Bay Area Community Builders will secure funding in the form of private or public grants such as a community development block grant in order to subsidize the cost of construction and development to the homeowner and create a greater incentive to provide housing to very low-income tenants. The contract drawn at the start of the grant-subsidized project will stipulate that the tenant be in the very low-income bracket. The loan amount required is significantly less than that of the Owner-Based-Loan Model.

Scenario with Development Grant

7.3 Fixed, Variable, and Semi-Variable Costs

In year one, BACB will undertake two projects. For a detached unit of 600-square feet,it will cost approximately $50 per square foot, plus an additional $10,000 to connect the unit to the utilities of the primary home, for a total of $40,000. Staff salaries are $60,000. The company will increase the number of staff in proportion to the number of projects undertaken. By year five, BACB aims to have 82 units of affordable housing units on existing lots in Redwood City.

Since BACB will only take on two projects in the first year, our advertising costs remain low until we take on more projects. As the business expands and acquires the experience and funding necessary to serve more clients, the company will have a greater need for advertising, yet advertising costs will remain low. This is reasonable since nonprofits traditionally rely on word of mouth and referral for most of their clientele, both of which are free.

BACB will also install a Web site for better publicity, but will rely on volunteer programmers and our own staff to facilitate this. There will not be any costs associated with hosting either because the site will be relatively small, and hosting from a personal computer will be possible.

As for the costs to the owner, insurance and tax costs were based on the estimated cost of the second unit, and the local property tax rate of 1.275%. Average cost of the second unit was based an estimate from developer Paul Wong, and 6.875% is the estimated current rates for home loans. Management fee is set at 7% based on the fee charged by local property management firm Cal Western Property Management. Other costs to the owner are estimates based on average costs of property management in the Pacific region (primarily California).

7.4 Months to Breakeven and Positive Cash Flow

In its most conservative model, Bay Area Community Builders will require a initial grant of $170,000 to launch its operations. With this funding, the company will rely on the grant for its first three years and run on a positive margin. By the end of the third year, the increased number of projects undertaken will result in actual revenue and positive cash flow for Bay Area Community Builders. Acquiring more clients will allow our company's income to increase substantially and successively through the years. Revenues will be used to expand the number of projects and geographical area covered by company services.