Thinking of entering a joint venture development project with your bare land? Understanding the residual value of your land is absolutely crucial.
*** It’s not just about the current market price; it’s about the land’s potential after development.***
This is where a thorough feasibility study comes in.
This study should include a detailed market analysis, accurate development cost estimates (materials, labor, permits, professional fees, marketing, sales), a realistic project timeline, consideration of the developer’s profit margin, and financing costs.
Based on this, detailed cash flow projections are essential.
These projections will show anticipated income and expenses over the project’s life and help determine when the land value is realized.
Now, for the residual value calculation: This is the projected sales revenue from the developed project minus all development costs and the developer’s profit. This resulting figure represents the maximum value attributable to the land.
***Your land contribution can take several forms:***
- Contributing the land as equity in the project,
- leasing the land to the developer, or
- a combination of both.
The residual value calculation provides a strong starting point for negotiations with the developer.
