How to Calculate the residual Land value article

Development, Financial Model, Real Estate

Excel, IRR (Internal Rate of Return), NPV (Net Present Value), Uses and Sources of Funds, Valuation

The Residual Land Valuation model allows you to determine the value of a piece of buildable land from a developer’s point of view by analyzing how much a real estate developer should be willing to pay for the land so that he can still make a decent return. Understanding the developer’s profit and return calculation is the key to maximize the value of land with construction rights during price negotiations.

Below video explains how the model works:

The financial model template allows you to put yourself in the shoes of the developer:

What price he/she can sell the developed land/real estate project?
How much his/her development costs are expected to be?
How much bank financing can he/she obtain?
How long will it take him/her to develop the land?
What profit/return does a developer require in order to do such a project?
How much a developer can afford to pay for the land so that he can still make a decent return?

The residual land value calculation starts from the revenues and costs a developer will incur when developing the land, his required profits and results with the residual value a developer should be willing to pay for the land (see screenshots for more details on the valuation approach used).

This financial model template in Excel puts you in the shoes of a real estate developer by first calculating the residual land value but then also to obtain more details on the likely development plan and time required for the development. The model includes a detailed phasing plan over the course of 5 years where expected cash flows (revenues, costs, etc.) can be allocated easily to the appropriate years. This allows to calculate the Unlevered and Levered Free Cash Flows and obtain more insights into the expected Internal Rate of Return (IRR) a real estate developer can expect to obtain when pursuing this project. Keep in mind, a real estate developer will only pay the residual land value if he is convinced that he can generate a decent return on his investment

The model comes in two versions:

Version with Yearly Cash Flows over 5 years => this is the model which for normal purposes will be fine to use
Version with Monthly Cash Flows over 5 years => this version is more intended for real estate appraisers wishing to obtain more precision in their calculations. When you purchase this option you will also get the yearly version.

Both models come either as Free PDF Demo version or paid Excel version with all cells editable. Feel free do download the Free PDF Demo versions to check the model out.

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