Exit cap on multifamily deal where the underlying land will be worth as much/more than structure?
I'm sure more experienced players know how to treat this scenario:

You are putting together a pro forma and you would normally have an exit cap that is slightly higher than the going in (maybe 50-100 bps increase to express more risk and because structure is older or whatever).

Maybe if there is a lot of expected growth on the way out of the deal, then maybe you justify an identical cap or even lower on the way out but how would you select a cap rate to express the underlying development value in the land itself? 

In this case it's a lowrise deal that has a future land use that dramatically increases density in an area that is already gentrifying. 

&amp;#x200B;

Thanks.
[{"id": "hixes4t", "text": "I would say its hard to speculate on land price and how that translates to projected exit cap 5yr out... Maybe you can speculate that demand will never end and someone in 5yr will want to build a residential tower paying 15-25% (3-5%/yr) higher the current market land PPSF then see how that cap rate works out against your projected NOI (might need to call some land brokers). Just a thought, not an expert", "replies": [{"id": "hixpfda", "text": "Makes sense, thanks", "replies": [], "depth": 2}], "depth": 1}, {"id": "hixhzv1", "text": "I wouldn't use an exit cap rate. I'd use the projected land value, less demolition costs, as the reversionary value.", "replies": [{"id": "hixpdio", "text": "This makes a lot of sense, I guess I was being lazy using cap rates and I really instead need to do a basic development outline to give a more accurate valuation.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hixrkir", "text": "You\u2019re confusing income capitalization approach (aka rental income used with a multiple(cap rate)) vs cost approach (cost of construction - improvements\u2019 depreciation + land value). The 2nd approach might help build a better case for your situation.", "replies": [], "depth": 1}]