Environmentally–Minded Residential Construction Company
Environmentally–Minded Residential Construction Company
Green Earth Construction
721 Fossil Dr.
Abilene, Texas 79601
Green Earth Construction is a residential construction business that focuses on building simple, quality homes using sustainable construction materials and renewable energy systems in the foothills and mountains surrounding Abilene.
Green Earth Construction is a residential construction business that focuses on building simple, quality homes using sustainable construction materials and renewable energy systems in the foothills and mountains surrounding Abilene.
A typical Green Earth product will be a 1,600 to 1,900 square–foot, simple yet elegant Texas bi–level Baratch home constructed of alternative or “green” building materials (i.e. stone, recycled gyprock, fibrous cement, and/or earth). At a price of $150,000 to $190,000 with an average utility bill of $120 a month, this home costs less to build and operate than the typical single–family house, affording the owner more discretionary income for hobbies, sports, and vacations.
Marketing & Sales
Green Earth is targeting customers who make up an under–served niche market for environmentally sound homes. Our target customers can be defined as semi retired individuals who have as a significant concern in housing a desire to be surrounded by nature, respect the environment, and preserve for the future. Given their more limited purchasing power and more vocal concern for the environment, initially most of our buyers will fall into the Baby Boomer age and income category.
Our marketing strategy is to educate, focusing on customers who are sincerely interested in this type of housing and are seeking it out, rather than trying to convince people who are not motivated by a concern for the environment. Marketing tools will be low tech/high touch methods including word–of–mouth referrals and a website that will both promote Green Earth and provide a portal to sustainable building practices. Our identity will be one of integrity, honesty, standing by our product, and living by the principles on which the business is founded.
Green Earth is a developing business. The principal, Richard Brummer’s goal for Green Earth Construction is to make this a lifestyle business for himself and one or two select craft workers who believe in living sustainable and optimizing the use of renewable energy sources and alternative building materials. Others will perform legal and accounting operations on contract. He will focus his efforts on project management and site/building/systems design; these are his best skills.
Brummer will buy land in the West Abilene or the surrounding area in the first half of 2005 and build a model home that will be his residence. Ground breaking is expected to begin this summer. The home will be a personal investment and achievement; financially separate from Green Earth Construction; this will also serve as a model project to verify construction costs and schedules. Promotion of Green Earth will begin while the home is under construction, with the first customer acquired by the time the model home is complete. The first sale home is expected to be complete by November 2007. Upon completion and verification of financial projections, Green Earth Construction will market their services to promote one or two additional project starts by the end of the year.
Operations strategy will minimize cost through simple, functional home design and maximize quality through passive solar design, maximized energy efficiency, and sound construction. To achieve this objective, Green Earth will utilize the design–build approach to construction. Design–build requires continual, open communication with the customer. Thus communication and trust is the basis for our operations.
Our business projections indicate that we will become profitable in our second year. We are starting the business with a reasonable cash cushion. Our cash position remains relatively stable for the first five years, and then grows substantially.
We project our net equity to be about $466,000 after year five. In that year, our return on equity will be nearly 14 percent, which compares to a typical ROE for the single family housing industry of 11 percent.
We plan to obtain funding through loans and family support.
Because we are a lifestyle business, we do not plan to sell controlling interest in the company. We do believe that few great companies are built alone. We seek the support of lenders who will recognize a solid business plan, and who will understand the value that affordable Energy Saver homes will add to the community.
We have also signed agreements with potential investors for 40 percent of the company. Profit–sharing arrangements have been negotiated. Sharing in the accomplishment would be possible, too. Certainly, the investors would help us, and could have a huge impact on making a family’s dreams come true.
Green Earth Construction is organized as an LLC and is designed to be a lifestyle business for the founder, Richard Brummer. A licensed Professional Accountant, Brummer has extensive construction project management experience, Accounting and a CMC in Construction Accounting and Management. He is also a Licensed Real Estate Broker Associate. Brummer has the vision and energy to devote to this business, combining quality construction, efficient management, and professionalism.
Green Earth Construction is a forming residential construction business in Abilene. We will focus on building simple, quality homes using sustainable construction materials and renewable energy systems in the foothills and mountains surrounding Abilene. Green Earth will be organized as a limited liability corporation (LLC). Initially, Green Earth Construction will be a two–person team: a project manager/principal and a craftsperson/builder. The principal, Richard Brummer, will build a residence in 2005 that will serve as the model home to market the product and service. Our goal is to have two to three buyers under contract by the spring of 2007 and complete these by that year end. We intend to keep this a small, “lifestyle” business.
Protect the future through Energy Saver building, one house at a time.
Green Earth Construction plans to fill a void that falls between affordable manufactured housing, existing homes and custom top end homes that clutter mountain properties with their costly immensity. Our target market is the Baby Boomer age and income category, a group that values technology and the outdoors. While we cannot control rising land values, we want to provide affordable, natural solutions.
We plan to use a design–build approach, where we design a home to fit a customer’s budget and then build it. As changes occur during construction (as they always do), we adjust the design, products, etc. as necessary to make sure the original budget is maintained. We will be “Energy Saver builders” in the type of products we use. We intend to use many non–traditional, environmentally–sound materials and methods. We will strive for the highest energy efficiency. Our systems approach to design will maximize energy efficiency and functionality.
Green Earth Construction will start and remain a small, quality builder of Energy Saver homes. We will begin with minimal assets required for operations to make this a lifestyle business. We will take pride in the principles by which we run our business, build our homes, and live our lives. While we anticipate a growing demand for our product and services, we will maintain our mission to “protect the future and build green.” A maximum production of ten homes a year is forecast for Green Earth. Formally speaking, there is no “exit strategy” for this business. Our investors are primarily ourselves and our customers. Typically construction companies are not sold because it is the people, their service and their skills, which sell the vision and the product. Should Brummer or other staff separate from the business, they would either be replaced or the volume of homes built would be reduced. Since the costs associated with home construction are typically covered by buyer financing, there are few assets to be lost (or sold) with the exception of the Green Earth manager or builder. Therefore, our job satisfaction is just as crucial as the quality of our product.
Green Earth Construction is a contractor specializing in creating quality, comfortable, and affordable homes for the buyer concerned for our environment, the future, and simplifying the way we live. Green Earth Construction combines sustainable construction materials, methods and renewable energy sources to form a systems approach to home design in the Rocky Mountains and Farm Land of Abilene. Building an energy efficient solar home goes beyond providing additional layers of insulation and installing more windows facing south. It requires integrating all of the home systems that can benefit from solar energy without compromising aesthetics or construction quality.
A typical Green Earth product will be a 1,600 to 1,900 square–foot, simple yet elegant Texas bi–level Baratch home. Its massive walls made of straw, recycled gyprock, fibrous cement, and/or earth provide over twice the insulation and sound–proofing of a standard home. The earthen and tiled floor radiates the heat from the days’ sun shining through large, double–pane windows along the south wall. It is bright and warm, even during the season’s heaviest snowfall. It incurs marginal monthly utility bills by using innovative and efficient water and electrical systems, appliances, and fixtures. The structure blends with the lot on which it was placed; there is no need for “landscaping.” Gardens and xeriscaping (low–water landscaping using native plantings) are irrigated from collected rainwater and filtered gray water.
It is a small house but hosts a great dinner party after a day in the backcountry. Plenty of space is provided to store the owner’s outdoor gear collection. Living space is optimized by providing ample storage in partially conditioned space on the north side of the house. The earthen energy, warmth, and simplicity comfort its guests. It is a reminder to value the people and community it, versus the material clutter that fills most houses.
Green Earth Construction will be one of the growing subset of residential contractors building homes known as “Energy Saver builders.” Energy Saver building encourages cost–effective and sustainable building methods, conservation of fossil fuels, water and other natural resources, recycling of construction materials, reducing solid waste, and improving indoor air quality.
The Home Builders Association of Abilene area, along with the Governments Office of Conservation, the Energuide Home Energy Rating Program, and Public Service Abilene created the Energy Saver Builder Program of Abilene (ESBP). There are currently 167 residential contractors who are enrolled with the ESBP as builders. About half of these builders are small, building an estimated one to 12 homes per year. Green Earth will qualify as an Energy Saver builder under ESBP and will compete for clients against these other smaller companies.
In order to enroll their product as a Built Energy Saver home, builders must meet a minimum criteria set by the program. While doing so does guarantee a certain level of environmental and health conscientiousness in home construction, it does not approach design and construction from a systems standpoint, using solar design, renewable energy sources, or less expensive, higher quality alternative materials.
In addition, the average price of a new home in the Abilene surrounding area in 2004 was $249,753. Including the average cost of one–half an acre of land of $120,000 and site improvements (well, septic, driveway, etc.) costing approximately $30,000, an Green Earth buyer can own a home in the Western Abilene Surrounding area for less than $200,000. These are the areas where Green Earth Construction will be distinguished from our competition.
The housing market nationwide and in the Farm Land is excellent. Although “Energy Saver building” is a small segment of the industry overall, national home building statistics indicate that it is growing rapidly.
On both a local and national level, the homebuilding market is strong. Nationwide, sales of new one–family houses in December 2004 were at a seasonally adjusted annual rate. Although this is 4 percent below the revised November rate of 13,000,000 it is 26 percent above the December 2000 rate of 9,000,000. Spending on new residential housing units during December 2004 was at a seasonally adjusted annual rate of $240 billion, 2 percent above the revised November estimate of $239 billion. Total starts of single–family homes are forecasted to reach 1,900,000 in 2005.
Locally, 201 single family houses were sold in 2004 in the Abilene area market, about a 17 percent increase over 2000. With a mean sale price of $180,000 the size of the local market is 3 billion. Energy Saver building comprises about 10 percent of the total local homebuilding market; thus the local market is about $300 million.
Quality of life and good employment opportunities are what draw people to Abilene. The 1990s has been a decade of remarkable growth in Abilene. Four million individuals call Abilene home, and state forecasters expect the population to surpass 5.5 million in the next 20 years.
The demand for environmentally sound housing is increasing steadily according to Association of Home Builder studies. About 35 percent of Americans describe themselves as environmentally active or sympathetic, while 56 percent think environmental protection and economic development go hand in hand.
New home buyers are motivated by the basic need for shelter. To make a difference in the existing home market, we must understand what motivates people to choose the houses they choose, and then we must provide something more desirable than the existing stock. The choice of housing within any given price bracket is influenced by:
- investment gain potential
- lifestyle desires
- environmental considerations of building materials and utility costs
45 percent of respondents (regardless of age, income, or gender) to our marketing survey conducted in February, 2005 indicated that they were “somewhat” to “very” interested in Energy Saver homes.
Green Earth Construction will target customers who make up the under–served niche market of homebuyers who are very motivated by environmental issues. It is with this in mind that we will initially target the 45 to 67 year age group, often referred to as “Baby Boomers.” Since our homes are designed to be “no frills” structures with prices between $140k and $180k, they will be fairly affordable to young people with limited disposable income. This is also the market segment with the greatest stake in preserving the environment since they will be concerned for the future of their own children. The potential market for these buyers is huge since young singles are the fastest growing household forming segment of the population.
Once Green Earth Construction is setup we can begin to target the other segments. Our primary focus will continue to be on environmentally–sound, affordable housing, but we will be open to adding the “frills” or conveniences that other buyers may be interested in, such as bamboo or cork flooring, tile, or other decorative touches.
The construction industry in Abilene is large and has attracted national companies. Green Earth Construction is prepared to meet them head–on by appealing to a distinct niche.
There are approximately 1,120 members of The Abilene Home Builders Association, and 490 belong to the Energy Saver Builder Program (ESBP). Additionally, there are many contractors and developers who do not belong to either organization. We will limit the discussion to those that market themselves through the professional organizations.
Competitors can respond quickly when it comes to the type of building we do, but we feel that most won’t view us as competition. Since we are aiming at building five to ten homes per year, we fall outside the radar of the large companies. Their strategy is to provide something for everyone, not to target a specific type of buyer.
Direct competition is possible from Abilene–based Hardy Building Corp. This small Energy Saver builder has built 15 homes across Abilene, but would like to be more local to minimize the drive. Additionally, a new Energy Saver builder, Mitchell Products, is starting in Fort Worth, located about 160 miles from Abilene. However, even small builders who might view us as competition would have an entire methodology, not just a construction method to copy and provide the type of service Green Earth offers.
The purpose of Green Earth Construction is to design and build high–quality, environmentally–sound single family homes, one at a time. This will be achieved by positioning Green Earth Construction as a unique building company that creates quality, comfortable, and affordable homes for the buyer concerned for the environment. Our target market is different segments of the consumer market whose criteria for housing include affordability and the marketing tools to be utilized will be low tech/high touch methods including speakers’s bureaus, word–of–mouth referrals, open houses, realtor/lender/supplier referrals, conferences and seminars, and a website that will both promote Green Earth Construction and provide a portal to sustainable building practices. 2 percent of sales will be allocated to marketing.
We are targeting customers who make up an under–served niche market for environmentally sound homes. Our target customers can be defined as semi retired individuals who desire to be surrounded by nature, respect the environment, and preserve for the future. Customers will come from all age segments of the market—Baby Boomer, Empty Nesters, and Retirees. But given their more limited purchasing power and more vocal concern for the environment, most of our buyers initially will fall into the Baby Boomer age and income category. Our target market, therefore, is potentially very large.
Evidence that home buyers want Green Earth’s product has been gathered in research conducted by the Abbie Marketing Group, Association of Home Builders, and our own market research. These data indicate that about half of those questioned expressed interest in sustainable building practices. Importantly, those who are interested in this type of home are not willing to pay a premium. Green Earth’s systems and methodology will not require spending more for “being green.”
Therefore, our marketing strategy is to “preach to the converted,” focusing on customers who are sincerely interested in this type of housing and are seeking it out, rather than trying to convince people who are not motivated by a concern for the environment. Those who are deeply concerned about sustainability are likely to prefer dealing with a company that doesn’t only “talk the talk.” Since we will position ourselves as the only area builders that specialize in Energy Saver building, we believe we can capture most of the buyers who want a specialist. However, we do not intend to become a big builder using production building techniques; our goal is to build no more than 23 homes per year.
Green Earth Construction is a service–oriented company with a unique product designed for people who value simplicity and the natural environment. What differentiates our product in our target market is that we specialize in Energy Saving buildings, unlike our competitors who are able to provide Energy Saving design and construction, but don’t specialize in it.
Our primary strength is our people. Our founder, Richard Brummer, has extensive construction project management experience, a CMC in Civil Accounting and a Construction Accounting and Management. He is also a Licensed Real Estate Broker Associate.
Our other strength is our integrity. We pride ourselves in our genuine commitment to the future of the earth, our respect for nature and her resources, and our desire to live in harmony with all things living. We design and build homes in tune with these values for people who share these values.
Our main weaknesses may be seen as an idealistic, healthy regard for the planet which may lead to a perception of our company as not serious about competing in a real–world environment. But Green Earth is serious about providing high–quality, environmentally–sound single family homes. Customers who are interested in this type of housing will select us because of the type of home we build and because of the professional, personalized service we offer.
Competitors can respond quickly when it comes to the type of building we do, but we feel that most won’t view us as competition as we will only be building five to ten homes per year. Their strategy is to provide something for everyone, not to target a specific type of buyer. Additionally, even small builders who might view us as competition would have more than just a construction method to copy. We pride ourselves on a systems approach which needs the unique input of Green Earth’s people and methodology. One aspect of what we do might be reproducible, but not the entire system.
Using a target sales price of $150,000 to $190,000, Green Earth will use the design–build approach to pricing our natural homes. A budget is set from the very start of the project with the buyer and the home is designed and built around that budget. This is different from our competition:
- Production builders offer a small selection of specific homes with specific options at a set price.
- Other custom builders use design/build initially, but it is common for budgets to be exceeded because of design changes and inherent risks during construction (e.g. unfavorable site construction, weather delays). Many contractors make a large profit from these change orders, hence they welcome additions and modifications.
The design–build delivery method is very unique to residential construction but can be achieved with open communication and trust between Green Earth Construction and our clients. For example, if additional fill material is required because of poor soil conditions on which to place foundations, this is an added cost but a situation that was unforeseeable by Green Earth Construction prior to breaking ground (unless extensive geologic testing was performed). In our contract with the customer, this is an inherent risk in the process and must be addressed on a case–by–case basis. To maintain the original budget, modifications (e.g. reduction in size or type of materials) to the super–structure are evaluated to make up for the added cost for the foundation. This ultimately keeps our pricing down as we are not including these “factors of safety” into our costs (as most contractors would do).
This will be an attractive strategy for our customers. Not only does it designate a firm budget, it promotes continuous, open communication and trust between Green Earth and the buyer. This aspect of our business will sell itself as our production, hence our reputation, grows.
Green Earth Construction will employ a low tech/high touch strategy for advertising and promotion. Although some print advertising may be used, e.g., Yellow Pages ads and occasional newspaper advertising, we believe personal selling and publicity will be more effective ways to get our product before the eyes of consumers. Because it affords the greatest opportunity to focus on target markets and specific customers and to deliver a specific message, personal selling by the principal, Richard Brummer, will be the main form of promotion. Brummer will deliver talks to groups ranging from Chambers of Commerce to university groups and courses on environmentally–sound building. He will join speakers’ bureaus and local planning boards to have access to other audiences and will participate in appropriate conferences and seminars. Additionally, his home will serve as a model home for tours so potential customers can see what their home will look like and talk personally with the builder. With his extensive relationships among local realtors and suppliers, Brummer will ask them to act as personal referrals, thus activating a word–of–mouth publicity network. As homes are built, customer word–of–mouth will grow this network.
Green Earth Construction will also have a web presence. The website will provide online advertising— vital to reach our technology–savvy target market. More importantly, the site will have a value–added function that provides a portal to sustainable building practices. Therefore, Green Earth will use the Internet to position itself as a company that not only builds Energy Saver homes but is a resource for “all things green.”
Our annual budget of $20,000 for marketing and sales is low, but this is largely due to the fact that the business is small enough that it does not need a dedicated marketing/communications or sales staff, thus eliminating the need to allocate salaries for this function. The budget, therefore, comes entirely out of operating expenses. We anticipate the majority of our business will come through networking and reputation/word–of–mouth. We will maintain brochures, a web site, a Yellow Pages ad, and some small, periodical local advertising. Additionally, we will participate in one or two local trade shows annually.
A homebuyer’s initial experience with Green Earth is spending a few hours “in the product”. The model home—a simple, refined southwest Baratch home—has massive, light colored walls that reflect daylight throughout. The earthen and tiled floor radiates the heat from the days’ sun shining through large windows along the south wall into the kitchen, dining nook, and living room. Guests are invited to go through the entire house, allowing us to describe the systems integrated within. We talk with the customer over lunch as we evaluate her budget and needs. We sketch some plans, conceptualize size and layout by comparing it with the model that surrounds us, and explain how we will design and construct the best home, by the same sustainability standards, for that amount of money.
Operations strategy will minimize cost through simple, functional home design and maximize quality through state–of–the art energy efficiency and sound construction. We anticipate longer project schedules than production–built homes because of permitting delays due to “nontraditional” systems and materials. We estimate approximately six months to design, permit, and construct each home. Finally, we will be flexible in our designs only to the extent that the customer is willing to pay for “extras” at a premium. Our mission is to provide a home that is easy to design, permit, construct, and maintain while being functional and appealing in its simplicity and durability.
Green Earth Construction will employ the design–build approach to residential construction, an increasingly popular delivery method in commercial and industrial construction. Design–build requires continual, open communication with the customer. The builder and manager must commit service and knowledge in return for the customer’s trust and understanding, including any inherent risks or uncertainties that may arise during the course of the project.
Communication and trust is the basis for our operations. Green Earth will focus on core strengths of employees to maximize product quality, project efficiency, customer service, as well as our own job satisfaction.
We add value for our customers using the following philosophies:
- Design/build approach (maximize value for each customer);
- Systems approach (for sustainability, durability, comfort, and minimal life–cycle costs);
- Experienced, organized, resourceful, friendly project management;
- Live by the principles on which the business is founded.
During the first year of operations, Brummer will be responsible for the following tasks:
- Customer support
- Designs and budgets
- Obtaining architectural and accounting approvals and required permits/inspections
- Project management
- Back–office administrative support
As the business grows, accounting and billing will be outsourced. Once production reaches four homes or more, a new manager will be hired to assist with project coordination. Initially, a craftsperson will be responsible for all on–site activities, including:
- Carpentry and other trades
- Ordering materials and coordinating delivery
- Scheduling/coordination of all subcontractor work
One craftsperson can be expected to perform these activities to build three homes annually. Additional builders will be brought on as needed. Candidates will be experienced homebuilders who are professional, value their trade–skills, and live by the principles of Green Earth Construction. Our goal is to build a team where people do what they enjoy most.
Approximately half of the trades will be subcontracted. Our business with accountants, architects, subcontractors, and material suppliers will be performed using standard contract documents that will be reviewed by Green Earth’s attorney. We will strive to work with only a few carefully selected designers and subcontractors on all of our projects to maintain a healthy working relationship. While we will work under a formal contract for all of our services, teamwork and negotiation will be emphasized to minimize disputes and maximize the project, the product, and our job satisfaction.
Green Earth Construction’s operations will initially be home–based where Brummer will perform project management functions while the crafts worker will be on the job site. Brummer’s home will also serve as the Green Earth Construction’s model and will be located in the foothills or mountains west of Abliene. We anticipate a majority of building will be completed “in–season”, or from April through November depending on the location of the home. While it is not uncommon to have mild winter weather to work, it is difficult to predict and maintain productivity. This winter “season” will be spent marketing and preparing designs/permits for upcoming projects and completing interior systems.
The company will own only office and communications equipment (computer, printer, copier, fax machine, telephones, and cellular phones). A truck and tools will be the property of the crafts worker to be deducted individually as business expenses. Specialty field equipment, such as survey instruments, scaffolding, etc. will be rented as necessary.
As Green Earth Construction grows beyond a production of five homes annually, we anticipate acquiring a small storage and office space in one of the surrounding towns. Storage will be used for excess building materials, tools, plumbing/electrical supplies, etc. The office space will be utilized for day–to–day project management operations for Brummer and the second manager.
Cost of goods sold consists of the on–site labor, materials and rented equipment used by our craftspeople, subcontracted services, fees (architectural, accounting, permitting), and contingency (approximately 7 percent). It should be noted that site–specific fees subject to all new development (i.e., geologic testing, well or septic installation, water taps, utility tie–ins, drive ways) are NOT included in these costs. Installing a well, septic system and driveway on mountain properties can range from $16,000 to $39,000. Since these are unique and vary widely for each project, they will be addressed separately in our contract with the buyer.
Capital expenditures are minimal. Since we will be organized as an LLC, the project manager and crafts workers will be responsible for their own vehicles, tools, etc. that can be deducted as business expenses. Larger equipment, tools, etc. will be rented. Green Earth Construction will own (or lease) telephones, computers, and associated office equipment only.
The first priority of the principal is buying land and building a home that will both serve as a model home and residence. This home will serve as a feasibility study as to the pricing, process, and structural integrity for Green Earth Construction’s marketable product. If it takes longer or costs more than anticipated, if permits and/or construction loans prove difficult to attain, or if building materials do not hold up as planned, these will all be valuable lessons to roll into our operational plans.
Plans for the model home have been selected. The factors that need to come together to make our concept work include securing land and a construction loan, hiring a crafts worker and getting bids for subcontractors, purchasing materials, breaking ground and getting to work. To this end we are actively looking for suitable lots in the mountains for construction, talking with qualified craftspeople and subcontractors, discussing permitting and zoning with city and surrounding area authorities, and investigating alternative building materials.
Marketing strategies will coincide with building. In addition, operational necessities including business phone lines, wireless phones and pagers must be procured.
Construction of the model home should be as straightforward as the construction of a customer’s home. However, the same risks of any homebuilding endeavor apply: economic downturn, unforeseen environmental problems, natural disasters, and so on.
A seven–month development timeline is attached. Development of Green Earth Construction will begin with the purchase of land on which to build the model home. Site selection is in progress and ground breaking is expected to begin this summer. Business promotion will begin while the home is under construction, with the first customer acquired by the time the model home is complete. The first sale home is expected to be complete by November 2007.
Development expenses are minimal. Since Brummer will build the initial home as his residence and will pay for it with a conventional construction loan, the cost of building it is not considered in our financial analysis as a development expense. Additionally, for the first few years the model home will serve as the office, so no office lease expenses will accrue. Brummer and the crafts persons will use their own vehicles, so a company truck will not be needed, at least as the company gets started.
Our financial projections focus on building a profitable lifestyle business.
Our business model makes the following significant financial assumptions:
- Before the business begins operation, Brummer will purchase land, design a house that demonstrates significant aspects of the Green Earth Construction philosophy, and build that house. The house will serve as his primary residence, as the place of business, and as a model of Green Earth work.
- Brummer will rely on savings and personal credit history to secure a construction loan and, subsequently, a long–term mortgage for that property. When he begins Green Earth’s, Brummer will have a personal mortgage of about $140,000 and a strong credit history.
- Green Earth customers will purchase land themselves.
- Green Earth customers will secure their own construction financing, with Green Earth designated as their builder. Customers’s lending institutions will arrange to make progress payments to Green Earth as the home is completed.
The assumptions imply that beginning the business will rely on finding customers who have better–than–average credit ratings or personal resources. We believe this is consistent with our initial target area.
We expect to lose about $15,000 in the first year, as we begin the business by completing a single home. Production ramps up to 3, 5, 7 and 8 homes in subsequent years. We expect to recover our initial losses after the second year, and proceed to build equity steadily, up to about $115,000 after year five. Our cash position should remain fairly steady for the first three years, and improve significantly in years four and five. In the fifth year, our return on equity is nearly 35 percent, which compares respectably with a typical value for the single family housing industry of 29 percent.
Capital Investment Requirements
As explained above, our capital investment is minimal. We will require enough working capital to provide for:
- Initial office equipment purchases (computers, fax, copier and software).
- Costs incurred before progress payments begin to arrive from the first project house.
- Ongoing operations, as expenses are incurred before progress payments are received.
An initial investment of $120,000 will be enough to meet our cash needs. With that much capital, projections indicate that cash reserves will drop to about $87,000 during the first year. Year–end reserves will fluctuate around $70,000 for the first three years.
We expect that funding will consist of:
- $66,000 of personal resources (personal savings, or investment from family members).
- A business loan of $ 120,000.
Beyond the funding needed for operations, we plan to seek an additional loan pre–approval of $150,000. We plan to use those funds to encourage our first customers and their lenders, to “buy in” to our business, by purchasing the building lot ourselves.
We plan to aggressively ramp up home sales and production after the first year. If we sell or complete fewer homes than planned, our income projections will be delayed.
The risk of reduced sales is mitigated by the fact that we do not incur material, subcontractor or significant labor costs until a construction contract has been signed. Our plans to increase staff are conservative, and could be adjusted to cope with different levels of sales.
Construction delays are difficult to project, and have various possible causes—material shortages, weather, and design surprises. Because we expect to enter into contracts with a design–build philosophy, we plan to educate our customers and maintain very active communication right from the start. The design–build approach was developed to permit rapid, in–budget response to problems.
Our financial projections indicate that if we completed one less house per year than our baseline, our profits would be reduced, but we would still break even in the second year, make profit in the third, and keep our cash position positive.
Because we do not rely on selling homes to the upper end of the market (homes over $350,000), we believe a market downturn would not destroy us—it might even bring us a new segment of customers.
Formally speaking, there is no “exit strategy” for this business. Brummer expects to build an economically–sound lifestyle by building environmentally–sound homes. Should he or other staff members separate from the business, they would either be replaced or the volume of homes built would be reduced. Since the costs associated with home construction are typically covered by buyer financing, there are few assets to be lost (or sold) with the exception of the Green Earth manager or builder.
We have baselined getting the bulk of our funds through loans. We believe this is compatible with a small, personal lifestyle business. Our business plan does permit some flexibility in this matter.
To meet our cash flow needs during the first five years of Green Earth Construction we will seek an operating loan in the amount of $30,000.
We would expect to pay a nominal premium above prime for this loan. Conservative cash flow projections indicate that 1/3 of the loan could be repaid after year three, with the balance to be repaid after year five.
We will look for an opportunity to take on an additional $150,000 of debt on reasonably favorable terms. This cash would be used for temporary purchase of buildable land, to be contractually agreed upon with a Green Earth Construction home buyer, to ease the buyer’s financing situation.
We will seek a competitive rate for this loan, some nominal premium above prime. Cash flow projections indicate that interest on such a loan could be accommodated without significant impact. We would plan to repay the principal of the loan after year five, with a schedule to be negotiated with the lender.
We will seek a lender who has an interest in providing Green Earth with a significant competitive advantage early on. The land to be purchased could serve as collateral for this loan, and so we would consider a pre–qualified loan agreement which could take advantage of the collateral opportunity.
At the end of Year 5, our net equity is projected to be about $255,000.
Because the success of Green Earth Construction will depend on the quality and speed of decisions by the founder, we are not prepared to offer controlling interest in the company.
However, we do believe that there are investors and organizations who are motivated by the same dreams we have. Sustainable housing is more than just an exploitable business niche. Therefore, we keep the option open to share the risks, the profits, and the accomplishment ofGreen Earth. We believe that, in the long term, we can offer a return on equity at least as large as the general home–building industry.
Our baseline plan is built on loans. We realize that not all lenders will choose to lend to a new home builder. However, we do believe that with growing demand for Energy Saver homes, growing government promotion of sustainable development, and the availability of support options such as SBA loan guarantees, we will be able to obtain the funds we need to make Green Earth a reality.
Investor funds would reduce our need for loans. We would not claim, however, to offer our investors extremely high rates of financial return. The proper role of an investor in Green Earth would have to be negotiated on an individual basis. Certainly, the right investor would help us, and could have a huge impact on making a family’s dreams come true.
|Better business bureau fee||$ 299|
|Stationery etc.||$ 1,900|
|Company yard signs||$ 5,000|
|Answering service||$ 400|
|Website design||$ 2,800|
|Utilities start Up||$ 1,400|
|Expensed equipment/Computer/Copier||$ 8,000|
|Office furnishings/Lease or used||$ 5,000|
|Office supplies||$ 1,900|
|Business software||$ 3,000|
|Total start-up expenses||$|
|Start-up assets needed|
|Cash balance on starting date||$|
|Other current assets||$ 70,000|
|Total current assets||$|
|Long-term assets||$ 40,000|