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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:

  1. Go to the ‘Residual Land’ tab
  2. Select the return metric to use in your analysis using the drop-down menu in cell F19 (Current Return Value:)
  3. Set your target return value for the selected return metric by entering a value in cell G20 (Target Value:)
  4. Hit the ‘Find Residual Land Value’ button
  5. 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.

About the Author: Born and raised in the Northwest United States, Spencer Burton has over 20 years of residential and commercial real estate experience. Over his career, he has underwritten $30+ billion of commercial real estate at some of the largest institutional real estate firms in the world. He is currently President and member of the founding team at Stablewood. Spencer holds a BS in International Affairs from Florida State University and a Masters in Real Estate Finance from Cornell University.