Snoopy & others - if you want to understand the cash flows then below is a summary.
DayTr mentioned the 30% but I'm not sure you understood it correctly. 30% is not the capital growth of the unit price over 5-7 years, that is the management fee deduction from the ORA that is retained by OCA. It's not that it sounds credible, it is the contractual deduction before on-charging refurbishment costs on departure. This 30% deduction from the ORA is
before any capital gains on resales. So running some numbers:
- Let's say OCA builds a unit at a cost of $1m
- OCA sells said unit for $1.2m with a 'realised gain' of $200k (aka 'development margin')
- Over the first 3 years, OCA takes and keeps 30% of the ORA value as 'management fees'. Given the difference in timing of management fees charged against the ORA versus their release to the P&L, such deferrals of income recognition are referred to as 'deferred management fees' or DMF.
- Resident departs in say 6 years
- Unit is refurbished at a cost of say $150k
- Resident is repaid their ORA of $1.2m - $360k management fee - $150k refurbishment = $690k repaid in year 6/7 (note this is repaid from the proceeds received from the incoming resident, more on that below)
- After 6 years inflation at say 3% p.a. the unit now resells for say $1.4m in year 7 to a new resident
- Incoming resident pays $1.4m, OCA books a 'resale gain' of $200k (being new ORA of $1.4m less previous ORA value of $1.2m) - ignoring for now any sharing of capital gains with the departing resident. Note there is no double counting.
- New resident has 30% of their $1.4m deducted over their first 3 years of occupation
- and so on. as the cycle repeats
Run that through a cash flow model. Note the cash is not yet dropping out the bottom in total for OCA given they have used the retained cash to build another unit etc. IOW they are reinvesting that float to make more money.
Cash flows for modelling:
Year 0 has a cash outflow of -$1m for construction
Year 1 sees a cash inflow of +$1.2m
Years 1-3 sees 30% of the ORA 'earned' in the P&L but the cash is already in the bank account (consequently the ORA liability reduces by 30% over this time)
Year 6 sees the resident depart and there is a cash outflow of -$150k for refurb
Year 7 sees the new resident come in and pay +$1.4m (another cash inflow to OCA)
Year 7 sees the departing resident repaid their ORA less management fees less refurb = -$690k
Total cash banked from property transactions over the period years 0-7 (it's actually the same figures for years 8-12 assuming the resident stays 6 years) is a nett inflow of {-$1m + $1.2m - $150k - $690k + $1.4m} = +$760k
So from the property perspective in years 7-12 OCA has $760k in the bank, an asset worth at least $1.4m (ignoring inflationary gains in years 8-12 for now) and an ORA liability of {70% of $1.4m=} $980k for nett assets of $1.18m.
Nett assets of $1.18m is made up of initial gain of $200k + {30% of $1.2m retained=} $360k + {resale gain of} $200k + {30% of $1.4m retained=} $420k = $1.18m
I put up a detailed post on this elsewhere. Once the development stops, there is plenty of cash being produced on the assumption a) stocks are sold, and b) property continues to increase in value over the long term. I know I have not mentioned opex. Some opex is on-charged to clients for a nett cash cost of zero to OCA whilst other opex is funded from the management fees. History shows not all of the management fees are consumed by opex and there is in fact retained earnings from these.
I hope that helps.