Understanding & Calculating Residual Land Value

(Using Excel)

Presented by Tennyson Williams 1

Tennyson Williams 404-787-6609

tennysonwilliams@gmail.com

Rate Your Excel Skill Level 1 through 5

Presented by Tennyson Williams 2

1 = Very limited knowledge and skill level. Take things real slow.

2 = Somewhat limited knowledge. I can add and subtract but that’s about it.

3 = Average skill level. I work with spreadsheets somewhat regularly.

4 = Above average skill level. I can moderately work with and build formulas.

5 = Advanced skill level. I can build formulas, macros, goal-seek and other things.

Project Pipeline (Project Could be derailed at any point during the process [presents extreme risk to the Sponsor)

Land For Development

Re-Zoning Outcome

Feasibility Not Determined

Capital Raising

Permits

Completions, Profitability

Cost Feasible Rents Not Realized

Land Control/Acquisition

File Rezoning Application Order Environmental/Soils Start Marketing Capital raising

Part 1

Part 2;

Part 3 Deal Analytics Don’t Pencil

Our Objective •  Understand the Flow of calculations to arrive at

Residual Land Value and Required Rent Constant; •  Basic Excel Modeling Skills-no macros, no goal seek,

no multiple years, no discounted cash flows or TMV; •  We will build a re-useable static model which looks at

a stabilized year only; •  Those with more advanced Excel skills may find the

pace a little slow; •  Will entertain ALL questions; •  Feel Free to make any suggestions; •  Perspective is Developer’s but can be Broker/Owner; •  I’m using Microsoft Excel Version 2002, not an expert

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Topics Discussed I. Definition of Terms (15 minutes)

–  Residual Land Value, Front Door/Back Door Analysis, Floor Area Ratio (FAR) Cap Rate, Cash-On-Cash Return, NOI, Rent Constant, Development Profit, Cap Rate Spread.

II. Introduction of the Retail Case Study – University Plaza –  Eckerd Drugstore Anchor + local shop space –  Our objective will be to determine what maximum land price (or

Residual Land Value) can be paid to control the dirt –  If Seller wont accept the maximum price, our objective transitions

into determining what rent to charge the non-anchor tenants in order to meet the Seller’s price and salvage the project.

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Residual Land Value Defined

•  Many Definitions •  Here is a simple one:

•  A method used to determine the value and/or potential profitability of land minus any expenses associated with putting it into productive use.

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HIERARCHY OF PAYOUTS

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Profits/Return

Labor/Materials

LAND

Dynamic Analysis

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Profits/Return

Const. Costs

LAND

Net Rents

Capitalization Rate (“Cap Rate”)

•  A static one-year measure of the relationship between the Net Operating Income (NOI) and price paid for an asset.

•  Also used to determine value by “capitalizing” (dividing) NOI by a desired Cap Rate.

•  Pros: quick and easy, universally accepted •  Cons: does not consider debt or taxes. •  Where can I find cap rates? IRR.COM Viewpoint

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Cap Rate

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IR V

I = Stabilized NOI Where

R = Cap Rate V = Value

. .

Basic Development Profit Formula

Dev Profit

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NOI R

All-In Cost = - ___

C-O-C NOI All-In Cost

= _____ (Unlevered)

Project Analytics

•  Front Door Analysis –  Holds development cost constant

& solves for minimum rent (constant) necessary to achieve target cash-on-cost return

•  Back Door Analysis –  Holds pro forma rent constant &

solves for max land cost (residual land value) necessary to achieve a target cash-on-cost return

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Floor Area Ratio (FAR) •  Relationship between a building’s

total floor area (all floors) and the size of the land on which it sits

•  Also known as Floor Space Ratio (FSR), Floor Space Index (FSI), Site Ratio, and Plot Ratio

•  Example: An FAR of 3 means you can erect a building size of 130,680sf on 1 acre of land (3 x 43,560)

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Case Study University Plaza, Atlanta GA

INTRODUCTION OF CASE STUDY This case study involves a 3.6 acre rectangular site at the SE pin corner of U.S. Route 41 & University Ave in south Atlanta. The site is owned by Mr. Nguyen who began buying Atlanta land over 20 years ago. Mr. Nguyen is asking $1m per acre for his site. US Route 41 is a major north-south commercial corridor which once served as the main travel route to Florida. It is a 4-lane street and serves as the main collector artery for many south Atlanta neighborhoods travelling north into the downtown job center. This urban infill site is in an area that is underserved by retail and is situated just 3 miles south of the downtown CBD. The intersection is signalized, and University Ave provides access onto Interstate 75 les than 1/4 mile east of the subject site.

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Case Study: University Plaza, Atlanta GA

THE ANCHOR TENANT You have a relationship with the site selection chief at Eckerd Drugs, a major drugstore chain. After looking online at Eckerd’s existing stores and site development criteria, you convince Eckerd that the subject property presents a good location opportunity. Eckerd provides you with their prototype 14,797 s.f. drive-thru building plans and enters a 10-year LOI at $8.25 p.s.f./yr.

NON-ANCHOR TENANTS The subject site offers enough land to accommodate the Eckerd store plus additional non-anchor retail space based on the zoning ordinance. Non-Anchor retail vacancy rates in the immediate area are very low (5% to 7%) and are expected to remain low into the foreseeable future due to a lack of new construction and stable demand from many long-time local businesses. Rents for non-anchor space tend to range from $15p.s.f. to $20p.s.f. for older generation space. The site is zoned C-1 and enjoys a traffic count in excess of 30,000vpd.

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Development Analysis Case Study University Plaza Shopping Center, Atlanta, GA

•  Land size: 3.6 acres zoned C-1 General Retail •  Land Cost: $1,000,000 per acre (There are 43,560 sf in 1 acre) •  Maximum City Allowable FAR = .3287, Take off additional 10% shrinkage factor •  Acme General Contractors has submitted a Guaranteed contract proposal for

construction for $76.50psf (hard costs); Soft costs are estimated to be $13.50psf •  Anchor Tenant’s preferred prototype building size is 14,797 square feet. •  Recent market survey of Tenant Leases suggests the following Structures:

–  $8.25 psf NNN for anchor space fixed rent for 10 years –  $20.00 psf NNN for non-anchor space with 3%/yr inc.

•  Local Market Vacancy reports suggest stabilized rate of 7.0% NON-ANCHOR ONLY. Oper Exps/psf: Taxes $2.50, Insurance $.25, CAM $3.00

•  Investor market appears to support cap rates ranging from 7.5% to 8.0%. 5 TASKS:

NP

Assuming a sale of the newly completed asset upon reaching 93% occupancy,

Task 1: Determine the expected Stabilized NOI. Task 2: Calculate the expected range of Development Profit. Task 3: What are the Cash-On-Cash Return (C-O-C) and Cap Rate Spread Range. Task 4: What is the max land cost (“back door”) assuming a 10% required C-O-C. Task 5: Required Non-Anchor Rent Constant (“front door”) Needed to earn a 10% C-O-C.

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UNIVERSITY PLAZA 1 YEAR PRO FORMA Year 1

Potential Rental Income (PRI) 753,953 Space 1 Total Annual Rent NNN 122,075 Space 2 Total Annual Rent NNN 631,878

Vacancy & Credit Loss (in dollars) 44,231 Space 1 Vacancy & Credit Loss 0 Space 2 Vacancy & Credit Loss 44,231

Effective Rental Income 709,721

Operating Expenses (non-reimburseables) 12,717

Net Operating Income (NOI) 697,005

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UNIVERSITY PLAZA PERFORMANCE MEASURES

All-In Development Cost (incl. land @ asking price) 7,775,179

Market Value (upon stabilization) Low Market Value 8,712,560 High Market Value 9,293,398

Development Profit Low Development Profit 937,381 High Development Profit 1,518,219

Cash-On-Cash Return 8.96%

Cap Rate Spreads (in basis points) Low Spread 0.0096 High Spread 0.0146

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UNIVERSITY PLAZA SHOPPING CENTER RESIDUAL LAND VALUE

Back Door Analysis - Residual Land Value Maximum All-In Development Cost @ Desired Cash-On-Cash Return 6,970,048

Less Project Construction Cost @ 4,175,179

=Justified Maximum Land Cost 2,794,869 776,353 per acre (Residual Land Value) "Back Door"

Front Door Analysis - Required Rent Constant Required NOI To Achieve 777,518 Desired Cash-On-Cash Return

Less Anchor Tenant NNN Rent @ 122,075

=Required NNN Rent From Non-Anchors 655,443

Gross Up by 1-Vacancy Rate 704,777 22.31 psf To Arrive at Street Asking Rent (Constant) "Front Door"

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Let’s Build Something Together Please Open Excel. Suggestion is to use two computers if possible.