Understanding & Calculating Residual Land Value Session 2 (Using Excel) Tennyson Williams

Transcription

1 Understanding & Calculating Residual Land Value Session 2 (Using Excel) Tennyson Williams tennysonwilliams@gmail.com 1 1

2 Our Objective Understand the flow of calculations which lead to determination of RLV and Required Rent Spreadsheet is only the vehicle we will use to get there; Analyze Fiesta Flats, a 92-Unit Potential Apartment Development Project; 1. Setup the Input Page 2. Determine Net Developable Acres (building envelope) 3. Calculate the Stabilized Net Operating Income (NOI) 4. Determine the Performance Measures 5. Determine the Residual Land Value (Front/Back Door) 6. Unlevered, Static 1 st Year Stabilized Analysis 2 2

3 Dynamic Analysis Profits/Return Const. Costs Net Rents LAND 3 3

4 Cap Rate I. Where I = Stabilized NOI R = Cap Rate V = Value R V 4 4

5 Basic Development Profit Formula Dev Profit NOI = - R All-In Cost C-O-C (Unlevered) NOI = All-In Cost 5 5

6 Project Analytics 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 Front Door Analysis Holds development cost constant & solves for minimum rent (constant) necessary to achieve target cash-on-cost return 6 6

7 Case Study Fiesta Flats Apartments El Sereno, CA INTRODUCTION OF CASE STUDY Land Price: $1,050,000 US Site Size: 3 Acres Site Shape: Square ( X ) Location: NWC Huntington Dr & Alhambra Rd Zoning: R-4 Apartment District (FAR = 1.8); Will Build 3 Stories, 92 Units, All 2 BDRMS Construction Type: Face Brick With Concrete Block Back-Up/Wood Joists Stick Built Construction Costs (Open Shop): Hard Costs p.s.f.: $ Soft Costs-Architectural/Engineering: $ 5.90 Soft Costs Contractor Fee p.s.f.: $ TOTAL CONSTRUCTION COST EST. $ p.s.f. Source: RS Means Estimate

8 R-4 Zoning Ordinance Case Study Fiesta Flats Apartments El Sereno, CA 1. FAR = 1.6, and 40% of the site must be maintained as non-vehicular open space 2. Setback Requirements: a. Front Yard: Not less than 25 feet from any public street b. Side Yard: Not less than 10 feet between any building and any property line c. Side Yard: Not less than 25 feet from any public street d. Rear Yard: Not less than the height of the building e. Parking: Not less than 25 feet from street, and 6 feet from any property line NOTE: We will use a shrinkage factor of 15% to account for all setbacks & landscaping 3. Min. Floor Area: Shall be 380 square feet of habitable floor area per dwelling unit 4. Parking Requirements: 1 space per unit for 1 BDRMS, 1.5 spaces per unit for >1 BDRM 8 8

9 PRO FORMA ASSUMPTIONS All 2 BDRMS, 850 Square Feet Each 300 s.f. per unit of common area Scheduled Rent $1,250 per month 7% Vacancy & Credit Loss Factor Other Income Type 1: $100 per month/ parking space RUBS* 13% of GOI Other Income Type 2 = $500 per month cellular antenna Underground Parking Operating Expenses As Noted *Ratio Utility Billing System 9 9

10 FIESTA FLATS APARTMENTS PRO FORMA Year 1 POTENTIAL RENTAL INCOME 1,380,663 +Other Income (affected by vacancy) 345,166 -Vacancy & Credit Loss (in dollars) 120,808 =EFFECTIVE RENTAL INCOME 1,605,020 +Other Income (unaffected by vacancy) 15,000 =GROSS OPERATING INCOME 1,620,020 -Operating Expenses Administrative 16,200 Advertising & Leasing 32,400 Payroll 48,601 R&M 45,361 Management Fee 48,601 Utilities 162,002 Ad Valorem Taxes 89,101 Property Insurance 29,160 TOTAL OPERATING EXPENSES 471,426 =NET OPERATING INCOME 1,148,

11 FIESTA FLATS APARTMENTS PERFORMANCE MEASURES All-In Development Cost (incl. land) 14,682,525 Market Value (upon stabilization) Low Market Value 19,143,240 High Market Value 20,883,534 Development Profit Low Development Profit 4,460,715 High Development Profit 6,201,010 Cash-On-Cash Return 7.82% Cap Rate Spreads (in basis points) Low Spread High Spread

12 FIESTA FLATS APARTMENTS RESIDUAL LAND VALUE Back Door Analysis - Residual Land Value Maximum All-In Dev Desired Cash-On-Cash Return 14,357,430 Less Project Construction 13,632,525 =Justified Maximum Land Cost (RLV) "Back Door" 724, ,635 per acre Front Door Analysis - Required Average Monthly Rent Per Unit (GROSS UP METHOD) Required NOI To Achieve Desired Cash On Cash Return 1,174,602 +Add Back Operating Expenses 471,426 =Gross Operating Income 1,646,028 -Other Income Unaffected By Vacancy 15,000 =Effective Rental Income 1,631,028 +Vacancy & Credit Loss 120,808 -Vacancy & Credit Loss Affected By Vacancy 345,166 =POTENTIAL RENTAL INCOME 1,406,670 1,274 per unit/month 12 12

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