Development site valuation methods dcf vs simple feasibility vs …?
What methods do you use for a development site valuation in practise? Lets say for a simple multifamily development thats sold at completion. Residual method/simple feasibility seems like an easy method for quick results but even little changes in disposition value or construction costs give me huge differences in the final site acquisition price. Do people make a complete dcf of the construction period then value the asset at completion, etc? I have heard of a “canonical method” that parses out the cashflows and applies a different discount rate to each component (+ discounted stabilized asset - discounted construction cost = NPV for project or land value). Thanks in advance for sharing your ideas about this.
[{"id": "hu2dso6", "text": "I do a lot of land and use the land residual method. And yes it\u2019s a very volatile asset class that swings wildly in value. Even $20 PSF difference in the end unit residential condo can make or break a deal. That\u2019s why developers are first ones on the bus when real estate bubble goes bust", "replies": [], "depth": 1}, {"id": "hu2jasm", "text": "I develop opinions of value for land all the time. There are plenty of comparable sales available in my market though (DC/Maryland/Virgina).\n\nUsually the unit of measure is price per unit or per develop-able square foot.\n\nI'll usually do a land residual method as a supporting method. I don't particularly like it since you have to make a lot of assumptions but my clients like and understand it.", "replies": [], "depth": 1}, {"id": "hu3qpb1", "text": "I build out the entire development model and back into what you can pay for land to make it feasibility. In our model it essentially turns into what can you pay for land and still service mezz debt, so not too dissimilar to a hypothetical dcf", "replies": [{"id": "hu3snlk", "text": "Never understood doing it any other way.", "replies": [{"id": "hu3t15b", "text": "I mean the same is to forecast say, 10 years and discount back to present based on your figured development budget.  Basically, what's the NPV of those cash flows and are we over or under? \n\nIn reality its: can we service a 7 year I/O equity note and refi out the original capital in 3.", "replies": [], "depth": 3}], "depth": 2}, {"id": "hu4ech0", "text": "This is how I do it as well. You need to know your as complete before you can possibly know what the land value truly is", "replies": [], "depth": 2}], "depth": 1}]