All-in-One (Ai1) Walkthrough #5 – The Residual Land Value Calculation Module
This walkthrough, our fifth in the series, explains how the Residual Land Value Calculation module works and how to implement this tool into your analysis. You might recall, a few months back we discussed the concept of residual land value and shared a basic residual land value model. This module expands on the concepts discussed in that post to include a module in the All-in-One that allows you to drive to a land value based on a list of return metrics.
In an effort to provide greater instruction on how to use our All-in-One Underwriting Tool for Real Estate Development and Acquisition, we’re developing this series of walkthrough videos and posts on the methodology behind the various components of the model. Our hope is that if you are empowered with the how, you’ll be more willing/able to provide feedback to improve the model.
If you haven’t already, you can download the model here. This walkthrough uses beta version 0.3.12 of the All-in-One Model.
Video Walkthrough – Using the Residual Land Value Module
When is the Residual Land Value Module Important?
Imagine this scenario. Your favorite broker brings you an opportunity – 30.5 acres of land for sale zoned for retail in a prime location of your preferred market. You soon find out that the broker has likewise shared the opportunity with 50 of his closest real estate friends and you’ll likely be competing against multiple groups for this deal. Offers are due in three days and you need to put your best foot forward, price wise. What do you offer? How much can you afford to pay for the land while still hitting the returns you need?
The Residual Land Value module helps you answer these questions. Tell the module what return you want, selecting from various return metric options (e.g. unlevered IRR, development spread, levered equity multiple, etc), and the module will tell you how much you can pay for the land. It’s a helpful tool for those times when you don’t specifically know the land cost.
Turning the Module On via the Summary Tab
Turning the Residual Land Value module on is simple. After completing all of your underwriting, go back to the Summary tab. Under the ‘Include Modules?’ section, turn the ‘Residual Land Value Analysis’ drop-down menu (cell F32) to ‘Yes’.
Once you’ve turned the module on, a few things happen. First, a new tab entitled ‘Residual Land’ becomes available. It is within this tab that you complete your residual land value analysis. Also once turned on, the Land Cost section on the Budget tab greys out and the model uses the value from the Residual Land tab instead of the previously entered land cost on the Budget tab.
You’ll also likely notice, when you turn the module on, that the outputs on the Summary tab have changed. This is because the land cost assumption used in calculating the various outputs has changed from what had been entered on the Budget tab to what is arrived at on the Residual Land tab.
Running the Residual Land Value Analysis
Here is how you run the residual land value analysis:
- Go to the ‘Residual Land’ tab
- Select the return metric to use in your analysis using the drop-down menu in cell F19 (Current Return Value:)
- Set your target return value for the selected return metric by entering a value in cell G20 (Target Value:)
- Hit the ‘Find Residual Land Value’ button
- The model will iterate the land cost assumption until the target return is hit. You can see the Residual Land Value in cell G21 (highlighted in yellow)
If you have any questions, please don’t hesitate to reach out.
Frequently Asked Questions about the Residual Land Value Calculation Module
What is the purpose of the Residual Land Value module?
The Residual Land Value module determines the maximum land price you can pay while still achieving a target return metric such as unlevered IRR, development spread, or levered equity multiple.
When should I use this module?
Use this module when you don’t know the land cost but need to determine what you can afford to pay to hit specific return goals—such as when making a competitive offer on a development site.
How do I activate the module in the All-in-One model?
Go to the Summary tab and set the ‘Residual Land Value Analysis’ dropdown in cell F32 to ‘Yes’. This activates the module and makes the ‘Residual Land’ tab visible for analysis.
What happens when I activate the module?
The ‘Residual Land’ tab becomes visible. The Land Cost section in the Budget tab is disabled, and the model begins using the calculated residual value for land costs. Outputs on the Summary tab update accordingly.
How do I run a residual land value analysis?
Navigate to the ‘Residual Land’ tab, select a return metric in cell F19, enter your target return in G20, then press the ‘Find Residual Land Value’ button. The model will iterate until it matches the target return.
Where is the final residual land value shown?
The calculated residual land value appears in cell G21 of the ‘Residual Land’ tab. It is highlighted in yellow for visibility.
What versions of the model support this module?
This walkthrough uses beta version 0.3.12 of the All-in-One model. Ensure you have at least this version to use the Residual Land module.
Can I still enter a manual land cost if this module is on?
No. When the module is active, the model overrides the manual land cost in the Budget tab and instead uses the calculated residual value from the Residual Land tab.
What metrics can I target in the module?
You can target various return metrics such as unlevered IRR, development spread, levered equity multiple, and others by selecting from a dropdown menu in the module.
