Land residual value is what a developer can rationally pay for a site: the value of the finished project, minus every cost to build it, minus the profit the risk demands. The land gets what is left. It explains why two buyers can honestly offer wildly different prices for the same lot; they are not disagreeing about the dirt, they are disagreeing about the project standing on it.
Land value=Completed project value − Total development cost − Required profit
- Completed project value
- What the finished building sells or appraises for, usually its stabilized NOI at a market cap rate.
- Total development cost
- Hard costs, soft costs, financing, and carry through stabilization.
- Required profit
- The return the developer sets in advance for the risk, as a percentage of cost or of value.
- It prices the project, not the dirt. Change the project and the same lot is honestly worth a different number.
- Blind to what the seller paid or owes. The residual does not care about anyone's basis, only about what gets built.
- The required profit is set in advance as the price of risk. Treating it as leftover is how developers lose money slowly.
- Two credible buyers land far apart because they are underwriting different buildings, not different land.
Nine units, finished and sold at a 6.0% cap on $180,000 of income.
Raise construction cost by ten percent and the land loses $220,000. The lot did not change. The project did.
Related terms
All termsFLR (Floor Lot Ratio)
Floor lot ratio caps how much building area a parcel can carry: lot size multiplied by the ratio equals maximum buildable area.
FinanceCapital Stack
The capital stack is the ordered list of everyone whose money is in a deal and who gets paid back first: senior debt at the bottom, then any secondary debt, then preferred equity, then common equity on top.
InvestmentProforma
A proforma is the projected income and expense statement for a property: what the next owner is being asked to believe.
Terms arrive with the writing.
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