As many of you know, I started my career in residential land development first as a broker and later as a principal. During that time I built my fair share of residential land development Excel pro formas, modeling returns and forecasting cash flows for my clients and investor partners.
I’ve since transitioned into the institutional side of commercial real estate investments and don’t have opportunities to model these types of deals any more, but I nonetheless still possess the skills to pound out a quick land development model in Excel when necessary.
Over the years, I’ve received numerous requests to put out a back-of-the-envelope model for developers of single-family lots. So this model is on account of those requests.
Since releasing this model several years back, I’ve made several updates to the model including the ability to now include a second phase in your analysis and the option to also model partnership-level (i.e. equity waterfall) returns.
You might also like my single family home construction pro forma for home builders.
Back-of-the-Envelope Land Development Model – What’s Under the Hood?
This is a basic, back-of-the-envelope model for quickly calculating the potential returns and/or estimating the land value of a prospective project. The model spits out a summary of the estimated internal rate of return and equity multiple for the project, both on an unlevered and levered basis based on various assumptions. It also calculates equity required, with or without financing, as well as calculates the absolute equity at risk (equity in before entitlements).
To start, you’ll first set whether to analyze whether the project has one or two phases. You’ll then drop in some simple land-specific inputs for each phase: land purchase price, earnest money amount, due diligence cost and length, closing month, closing costs, land size in acres, and number of to-be-entitled lots.
Next, you’ll enter entitlement assumptions (length and costs) and construction assumptions (length and cost). Finally you’ll enter assumptions related to financing (rate and loan-to-cost) plus lot sales assumptions (absorption period, finished lot sales price, and closing costs).
With your assumptions properly modeled for each phase in your analysis, the Workbook runs an analysis up to 120 months of unlevered and levered monthly cash flows. The analysis allows for up two phase of construction, however with a little tweaking you can easily adapt the model to work with more than two-phase projects.
Video Tutorial of the Land Development Model
I put together a simple video that explains the different assumptions and outputs of the model. I also talk through what the model is and isn’t (it’s a back-of-the-envelope model, not a comprehensive analysis tool). The video was created using version 1.0, before the option to include a second phase was added. Nevertheless, the methodology and assumptions are largely the same. As time permits, I’ll record an updated video to go with v1.20+.
Walk-through of the Partnership-Level Returns Module
I added our Real Estate Equity Waterfall Model with Monthly Periods and IRR Hurdles to this model. This video will provide an overview of the model. Note that the video was initially developed for the standalone module. It initially shows you how to add this module to your own model, after which it walks you through adding assumptions to the module. I’ve tee’d up the video to start at the point when I walk you through how to add assumptions.
Download the Residential Land Development Pro forma
To make this model accessible to everyone, it is offered on a “Pay What You’re Able” basis with no minimum (enter $0 if you’d like) or maximum (your support helps keep the content coming – typical real estate Excel models sell for $100 – $300+ per license). Just enter a price together with an email address to send the download link to, and then click ‘Continue’. If you have any questions about our “Pay What You’re Able” program or why we offer our models on this basis, please reach out to either Mike or Spencer.
We regularly update the model (see version notes). Paid contributors to the model receive a new download link via email each time the model is updated.
- Added Profit and Loss section to each phase and to combined
- Added Phase I vs. Phase II timing in summary
- Fixed issue where combined cash flow header was using different month end date than phases
- Fixed analysis end month formula; had been calculating one additional month
- Misc. formatting enhancements
- Fixed error where total calculations (Column C) were not including all periods
- Misc. formatting updates and enhancements
- Removed period 0
- Edited date header on Project-Level Analysis to be the last day of month to match Partnership-Level module
- Added Partnership-Level Returns module
- Misc. formatting updates and enhancements
- Fixed issue where earnest money was improperly calculated
- Added logic that hides Phase II calculations when only one phase is selected
- Misc. formatting improvements
- Added version tab to model
- Added Summary section
- Complete overhaul of Phase I calculations to allow for duplication
- Dupicated Phase I cash flows, creating a Phase II option
- Added Combined Phase I & II Cash Flow section
- Extensive formatting changes
About the Author: Born and raised in the Northwest United States, Spencer Burton has over 15 years of real estate investment and development experience. In his current position, Spencer assesses new acquisition, development, and debt opportunities for a $45bn real estate fund. He resides in Dallas, TX.