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 last few months, I’ve received several requests to put out a back-of-the-envelope model for developers of single-family lots so this past weekend I put something together and thought I’d share it with you today.
You might also like my single family home construction pro forma for home builders.
BOE 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 drop in some simple land-specific inputs: 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, the Workbook runs an analysis up to 60 months of unlevered and levered monthly cash flows. The analysis assumes only one phase of construction, however with a little tweaking you can easily adapt the model to work with multi-phase projects.
Video Tutorial of 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). If you have any questions or comments, please don’t hesitate to reach out.
Download The Model
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 models sell for $100 - $300 each). 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.
Note (especially for Gmail users): The model is sent via email and occasionally is blocked by spam filters. If you don't see the email arrive within five minutes, check your spam folder.
Residential Land Development BOE Model
- A back-of-the-envelope model for evaluating small, residential land development opportunities
- Unlevered and levered IRR and Equity Multiple calculation
- Basic construction interest calculation (simplistic timing module means interest calculation is only an estimate)
- Good tool for quickly evaluating land opportunities to determine whether a deeper dive is necessary
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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.