Entitled Multi-Family Land Pricing Strategies

[Colton T.]

What is the best strategy for determining the asking price of entitled MF land prior to zoning / entitling it? I've heard a couple of opinions of what the price per unit approved would be, but is that the standard? How much do other factors come into play?  

For context, the land is in nice suburb of DFW market, by the way, where MF builders are having a field day. Looking to lock in a strong idea of sales price prior to entitlement process.

[Barry Ruby]

Colton, The best strategy for determining if the asking price is fair and reasonable is to determine the "as is" (un-entitled) value of the land. The best way to determine the "as is" value of the land is to figure out the Highest & Best Use and product you envision for the Property (Single Family detached/attached), Townhomes or Multifamily.

Once you understand the product, you need to establish density. Assuming it is multifamily, if the land is 10 acres in size, at an assumed density of 10/acre the entitled site would support a total of 100 units. 

Once you understand that you have a site with a potential of 100 units, you need to determine the retail value of the lots. Retail value is tied to how far up the "food chain" you take the land from "as is" to the point you want to sell or develop it. The retail value is tied to the extent of entitlements and includes a range of levels of approvals:

1. Paper Units/Lots- value add factors such as- annexation, zoning, site use

2. Shovel Ready Permitted Units/Lots - value add factors include expanding paper lot entitlement to reach a stage where the units/lots are shovel ready and can be sold to a 3rd party developer that will build the horizontal (site) improvements and sell the improved site to a vertical developer or both.

3. Improved Site- value add factors include you doing the site work and selling the fully improved site to a vertical developer.

In the case of multifamily, your most likely play is door #2 Monty, which is to sell the raw but shovel ready site to a developer. 

Now to answer your specific question, the value of the approved (shovel ready unit/lot) is the price that can be supported by the product and project you got entitled AND meets with the developer's (your buyer's) pro forma financial performance. Greg Dickerson's suggestions are a good start in trying to get to a per unit/lot value.

You can and should run your own pro forma and start it by working backwards using your developer/buyer's reality. Working backwards means doing a residual analysis by taking the finished product you believe represents market demand and deducting all project cost (including the developer's profit). This drill will produce the "shovel ready" value of units/land. 

Example: 

A 100 unit Multifamily project with an average unit size of 1,000 sf, Monthly Net before debt Rent $1.00 psf = $12.00 psf per year (NOI). Capitalized value of each unit is $171,429 ($12.00 x 1,000 sf)/7.0%

$171,429 retail value of 1,000 sf LESS: developer's profit, off site cost, on site cost, hard (vertical cost), soft cost, cost of funds and commissions and closing costs produces the RESIDUAL LAND VALUE. As you can see and for the reasons Greg stated, there is no "standard" but there are factors and methods

Feel free to DM me and I'll send you a pro forma that does this analysis.