Valuing Development Rights
Monkeys,
I’m looking at selling a deal, which is permitted with drawings for redevelopment. How do I go about valuing the development rights to an existing, stabilized asset?
Thanks!
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deleted This site is super glitchy and posted my comment twice
Would be helpful if you provided a little bit more information such as what the permit allows you to do, # units, what property type, etc... but assuming that this is a residential property and that the future buyer will build to sell, then
1.) Look at sold comps for similar condos/houses (same size, # bedrooms, # bathrooms, condition etc...) in order to project a total sellout value, then adjust for sales cost (closing costs, commission) that the future buyer would incur
2.) Estimate the construction cost (hard and soft) that the future buyer will need to spend to renovate/develop the project
3.) Use a 20-30% profit margin
4.) Back into your land price
5.) Take a step back from the numbers and ask yourself, if you were a developer/GC would you be happy to make whatever that 20%-30% profit margin is in nominal terms for the risk and work needed?
6.) Hire a real estate agent who knows GC's and developers in your area because they may already have a buyer in mind for your type of project and ask for feedback on your valuation.
edit Sorry I misread your development right as some type of entitlement/variance that you achieved. If by development right you mean just building permit with architectural/engineering plans etc...then to be honest, its not worth that much more than the building was without the building permit. Getting a building permit is a pain in the ass, but as long as it is an as of right development, any owner can do it. It's just a matter of time and hiring architects/engineers etc... so the value of the building permit is really just the cost that you saved the future buyer from spending on an architect/engineers and maybe like 3-6 months worth of cost of carry. You didn't add much value. If you took the risk of getting a variance and achieved it, then you added something of much greater value and your sale of the land should reward you for that risk (assuming you got a variance in a market that has demand for it)
Hire a land broker. They will have a good idea what the property is worth for the type of project proposed. Trying to back into a number is almost always a pointless exercise from the seller/broker perspective as there are far too many variables to determine what the actual development market would bear. Having some plans in place is helpful and can add value so long as the plans aren't too specific.
Then it's just an evaluation on whether its highest value comes from the building/cash flow or its land value. So long as the property is unencumbered by a long term lease (less than 2 years left), then it can reasonably be valued as land is the land value is much higher. If there is a longer lease, then it needs to be evaluated as a covered land opportunity. In which case you can generally get a premium on your cap rate so long as redevelopment opportunity isn't too far off (2-5 years). Any property tied up with a lease for longer than 5 years will only be valued and lent upon based upon it's cash flows and a standard cap rate for the product.
Are you asking how to underwrite the eventual fully stabilized asset or the asset as is-with entitlements/permits in hand? I think you have to do both either way to help understand it’s potential value now.
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