Residual Land Value
The real estate professional will use several methods to determine the value of a project. For example, appraisers use three methods of analysis – the cost approach, income approach, and sales comparisons. For investors and developers, the methods may include calculations on the back of a napkin, formal calculations in a spreadsheet, or a complete analysis using sophisticated software. Each method can be used conveniently, effectively, efficiently, and reliably at specific points in the analysis of a project. The results of the analysis may vary from an initial analysis to the more complex analysis based on the quality of the information used in the analysis.
The document provides a comprehensive guide on how to calculate Residual Land Value (RLV) for land development, single-family residential, multifamily residential, and commercial properties. It begins with an overview of the economic theory behind RLV and explains its purpose: to determine the maximum price a developer can pay for land while ensuring a profitable return after accounting for all development costs.
Key components of the RLV method include:
RLV Formula: Estimated Market Value minus Total Development Costs (excluding land).
Application: Used for preliminary land value estimates in residential subdivisions, multifamily sites, and commercial projects.
Valuation Methods: Includes direct capitalization and yield-based approaches using cap rates, which are derived from comparable property sales or investor expectations.
Excel-Based Modeling: Provides detailed formulas and structured worksheets to perform RLV analysis using assumptions such as sales prices, build costs, lot premiums, holding costs, and market data.
The document walks through RLV calculations step-by-step with example projects:
Single-Family Residential: Breaks down assumptions for lot size, front footage, sales prices, and builder costs. Calculates builder profit and checks developer net land sale revenues.
Multifamily Development: Evaluates site capacity, rent assumptions, operating expenses, and construction costs to derive value at stabilization. Solves for land cost based on yield on cost.
Commercial Development: Follows similar steps, incorporating floor area ratio, rent projections, and developer return metrics to assess feasible land cost.
It emphasizes the importance of accurate assumptions and flexible modeling to test scenarios and ensure viable development. Excel tools like NPV, IRR, and conditional formatting are recommended for dynamic analysis.
In conclusion, the RLV method is a foundational tool in real estate development that supports informed land acquisition and project feasibility decisions.