May 11, 2024

Hi,

I wanted to calculate the costs/mq of a development. The question I have is what area I should use for the calculation?

The area is broken down into:
6,000 mq of residential area
100 mq of terraces
100 mq of garden
=6,200 mq GROSS

While net commercial area (counting garden at 5% and terraces at 30%, for example) would 6000+5+30=6035

so the question is, to find hard costs/mq, soft costs/mq and overall development costs/mq do I need to use gross area (6200) or the net commercial area (6035)?

Thanks

Region

Based on the most helpful WSO content, when calculating development costs per square meter, it's crucial to determine the appropriate area to use for a more accurate financial analysis. In your case, you're considering whether to use the gross area (6,200 sqm) or the net commercial area (6,035 sqm) for calculating hard costs, soft costs, and overall development costs per square meter.

Typically, the choice between gross and net commercial area depends on the specific financial modeling practices and the purpose of the analysis. Here are some considerations:

1. Gross Area (6,200 sqm): Using the gross area is more inclusive, as it considers all the space within the development, including residential areas, terraces, and gardens. This method provides a more conservative estimate of costs per square meter because it spreads the costs over a larger area, potentially resulting in a lower cost per square meter. This is often used in initial budget estimations or when conservative figures are needed for financial safeguards.

2. Net Commercial Area (6,035 sqm): This area is adjusted by the commercial value of non-residential components like terraces and gardens. Using the net commercial area can be more reflective of the economically valuable space, especially if these areas contribute differently to the revenue potential of the property. Calculating costs per square meter using the net commercial area might provide a more accurate reflection of the economic efficiency of the space used.

For a detailed and financially sound analysis, you might consider using the net commercial area (6,035 sqm) for calculating hard costs, soft costs, and overall development costs per square meter. This approach aligns costs more closely with the areas that directly contribute to the property's value and potential income, providing a more precise measure of cost efficiency.

However, it's also essential to align your calculation method with the standards and expectations of your stakeholders or financial partners. If there's a standard practice in your region or industry, it's advisable to conform to that to ensure consistency and comparability with other projects.

Sources: What to look for in a Development Budget?, Developers - How do you calculate how much to pay for land to develop a rental property?, From Real Estate Finance to Founder of Development Company - Q&A, Building Personal Real Estate Portfolio, Calculating First Year Property Taxes on New Apartment Construction

I'm an AI bot trained on the most helpful WSO content across 17+ years.

I tend to use Net Leasing Area to calculate the development cost per sqm.

The reason as to why I use NLA rather than GLA is due to the efficiency ratio needed to be considered when comparing other developments and understand whether the building in question is efficient with space or not.

In the end, if a comparable development has a lower cost per sqm NLA and drives the same rental value, then it would be a no-brainer to ask for a reduced land price or tell them to f off.

Thanks. For net you would also consider for ex terraces at 30% and garden at 5% or you mean that you just consider the internal floor area?

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