DEVELOPMENT ANALYSIS METHOD (Valuation of Raw land for Subdivision Purposes )
ď ˝ Valuation
of raw land presents unique challenges. The analyst is working with a blank canvas of sorts, forced to analyze a variety of factors and make rational assumptions about a site best potential use.
ď ˝ The
valuation process essentially consist of two parts: â—Ś 1 ) determining the highest and best
use for the land, and
â—Ś 2)applying the appropriate valuation technique.
Highest and Best Use(HABU)
HABU generally is use if there is reasonably probable, physically possible, supported by the market, and returns the highest value to the land. The final estimate of highest and best use should be defensible, the logic internally, and the conclusions well supported and documented by facts as well as opinions.
Factors Involved in Exploring Highest and Best Use( HABU) 1.) Physical Factors 1. Size 2.Shape 3.Topography 4.GeoTechnical Issues 5.Environmental Contamination
2.)Regulatory and Legal Issues .a) Zoning .b) Utilities .c) Wetland .d)Fees
3.) Local and Market Factors In selection of HABU: a) the analyses should be supported by market demand, b) the analyst should be familiar with basic market trends of a given real estate sector, c) the site’s general location within a given market d) the analyses should be consider the greatest return.
APPROPRIATE VALUATION TECHNIQUES Development Analysis Method
- is applied to vacant or raw land for residential subdivision purposes . This method are applicable to all types of residential subdivision ( Single, family dueling sites) This would answer the problem of how much a subdivision developer or investor should pay for raw land and how much be rightly solved if a subdivision enterprise is to be profitable and successful.
When do we use Land Development Method
ď ąUsed to estimate the value of parcels land ready or likely to be subdivided; ď ą Use as a check or in conjunction with the Markets Data Approach
Used when detailed analysis of the project is desired; and Used to relates the value of “raw land” to its potential market value as developed land
Steps in the Land Development Analysis 1.Determine whether the subject site is a real subdivision acreage 2.Check proposed subdivision plan or design a hypothetical sub division schemein accordance with the highest and best use of the property
2.1. Ordinary land utilization (for fairly level land) -roads and alleys------25% -parks and open alleys 5% -net saleable area -----70% 2.2 For rolling topography, will vary.
ratios
3.Estimate expected Gross Sales Income based on proposed subdivision plan or hypothetical subdivision scheme. 4. Estimate Total Expenses and Charges
-Survey costs, site preparation, roads and pavements, drainage system, water supply, electrical supplies and distribution, systems, lot grading and landscaping, and engineering supervision.
-Project Consultants/Professional Fees Planning, design and project management, Fees for Architects and Engineers -Administrative expenses (Overhead) -Office and clerical expenses, legal fees, accounting costs, taxes, and permits, management charges, miscellaneous expenses.
-Marketing/Selling expenses -Advertising and promotions, commissions to brokers and salesmen and operating costs of sales staff. -Contingency item -Interest charges on working capital initial cash outlays required, normally on the land dev. cost
5. Estimation of reasonable Developer’s Profit 6. Discount “Ultimate land value” for an indication of the present worth of Raw land
Determining the Discount Period -Rate of absorption – depends on how fast the developed lots can be sold -Anticipated Marketing Program depends on the marketing strategy to be used -Market Growth Factor depends on the market, what class in the society.
SAMPLE Problem Determine the raw land value of the proposed subdivision development with the following data: 1.Total Land Area -300,000 sq.m. Area Allocations: 1.1.Saleable Area (70%) -210,000 sq.m. 1.2. Roadways/Open Spaces (30%) - 90,000 sq.m.
2. Selling Price of Comparable property in the vicinity: Based on Similar Dev. Subd. Lot-----------Php4,000/sq.m.
3.Estimated Expenses and Charges 3.1 3.2 3.3. 3.4. 3.5.
Land Dev. Cost Php500.00/sq.m. Consultants (arch,etc) 15% of LDC Administrative Exp. 5% of EGS Marketing Expenses 7% of EGS Contingency 10% of LDC 3.6. Interest charges on initial working capital 12% Int. of LDC
4. Est. Developers Profit (EDP)-30% of EGS 5. Discount Period/Estimated Development and Sales Period-5 years 6. Discount Rate (Int.rate + risk prem. + Inflation rate) (T-bill rate – 9%) + (risk prem. – 2%) (Inflation rate – 6%) = 17%
+
SOLUTION Estimated Gross Sales (EGS) 210,000 sq.m @4,000/sq. P840,00,000 Less : Expenses and Charges : Land Development Cost (LDC) (300,000sq.m.@500/sq.m.Consultants (15% o LDC) Adm. Exp.(840Mx 5%) Marketing/Selling Expenses (840M x 7%) Contingencies (10% of LDC) (150M x 10%)
150,000,000 22,500,000 42,000,000 58,000,000 15,000,000
Continuation of solution: Interest Charges (12% of LDC) 18,000,000 (150M x 12%) Total Expenses and Charges (Php306,300,000) NET SALES INCOME BEFORE PROFIT Php 533,700,000 Less: Developer’s Profit (30% of EGS) (Php 252,000,000) (Php840M x 30%) “ULTIMATE LAND VALUE
281,700,000
Php
Assuming Five (5) years for development and sales program, and discounting the ultimate Land Value at a discount rate of 17% per year, (present worth factor = 3.199346).
INDICATED RAW LAND VALUE:
= ULV x Present Worth factor Estimated Sales Period =
Php281,700,000 x 3.199346 5 years
= 180,251,153.60
= Php 180,251,153.60 300,000 sq.m.
= Php 600.80 SAY
= Php 600/sq.m.
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