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Think about topography, lot size and shape, soil and water, weather patterns and neighbouring developments. Instead, consider whether your proposal is physically possible. Is my proposed use physically possible? Forget about zoning and economics for now.The concept of the highest and best use is one of the fundamental principles of real estate development.Įvery feasibility study should consider whether or not the proposed development is the highest and best use, and whether another type of asset would maximise the value.
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Comparisons between projects with different time spans and investment opportunities can also be tricky.Ĭlick here to use our free feasibility calculator to calculate your development margin. The biggest disadvantages? It does not account for the time value of money, so it is ineffective on longer projects. This approach is quick and easy and is a good method for comparing similar projects on similar time frames. You then calculate the development margin by dividing profit by total development cost. The anticipated revenue is calculated based on the project sale values, and the costs (including land but not the developer’s margin) are subtracted to estimate the net profit. The simple formula below is known as the ‘back-of-the-envelope’ approach.ĭevelopment margin = Net profit / Total development cost Using this traditional model, you estimate the total development cost in current, not inflated, dollars (including interest on 100% borrowings).
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O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.When you know the exact price paid for land or can estimate its value, you can use the development margin approach to determine the proposed profit on your development project. Get Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties now with O’Reilly online learning. For example, in month one, the land is purchased and hence $663,025 is disbursed. Assumptions are made in the spreadsheet as to when the construction funds are actually expended. In the model, as is typically done, the preferred return to the investors is considered a distribution of profits shown when available rather than as a project cost. It is assumed it will take about six months to complete the plans and secure a permit, another year to build all of the offsite improvements, the medical office building, and the tenant improvements for the user, and another year to season and sell the project. The vacancy and collection loss is referred to as “nonrecoverable costs.” Used in connection with the inputted Excel figures is an Argus spreadsheet (see Appendix E on the companion website) outlining the income and expenses over a 31-month time frame.
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The program is called “Argus Developer.”Įxhibit 9.1 contains an Excel “Project Pro Forma” that restates the project's projected income and expenses and development costs. Argus has a specific program designed to assist a developer in analyzing a construction project.