Single Family Subdivision Deal Metrics?

[William Yeh]

Hey BP Fam,

I've just secured an off market listing for a 10 acre residential development opportunity in Vallejo, CA (tertiary bedroom community to San Francisco and Napa). To those that have had experience in developing single family subdivisions in CA, whether for build to rent or for sale, what are the metrics that tend to make you green light a deal on the raw land (cost per acre, minimum unit density, neighborhood/city characteristics, etc)? Curious what the rough guidelines are on pro forma for such a deal to pencil. TIA

[Barry Ruby]

Quote from @William Yeh:

Hey BP Fam,

I've just secured an off market listing for a 10 acre residential development opportunity in Vallejo, CA (tertiary bedroom community to San Francisco and Napa). To those that have had experience in developing single family subdivisions in CA, whether for build to rent or for sale, what are the metrics that tend to make you green light a deal on the raw land (cost per acre, minimum unit density, neighborhood/city characteristics, etc)? Curious what the rough guidelines are on pro forma for such a deal to pencil. TIA

Hi William,
The "Green Light" is generated by a combination of the factors you have cited. Values need to be established and set to allow each land/lot phase to reflect a "fair" profit margin all the way up the "food chain" which goes from raw land to built homes.

Raw Land Value, to Raw Lot Value, to Paper Lot Value, to Finished Lot Value to Finished Homes. No matter whether or not One Party takes the land through all of these phases or the first party only takes the site to Raw or Paper Lots, each phase of entitlement and or construction needs to leave enough "meat on the bone" for the party that takes the next step(s).

In the case you have cited, your first step should be to establish the density and product you plan as the Highest and Best Use(s).  This will allow you to define the "as is" value of the land and the Paper Lot values entitlement will create. Establishing Paper Lot Values will allow you to work backwards to set "as is" value.

For example, an assumed density of 6 Units per acre produces a total of 60 lots (6 X 10 acres). Assuming a $20,000 Paper lot value produces a total Value of $1,200,000. Assuming you spend $300,000 in fees and costs to get permitted, and you sold all of the lots with a brokerage commission of 5% your Paper Lot project would look like this:

 $1,200,000 Sale of 60 Paper Lots
-$   60,000 Commissions & Closing Cost
-$  300,000 entitlement fees
$  840,000 Net Sales Proceeds
-$. 300,000 (25% development profit on project value)
$. 540,000 land Value
The figures above assumes that land value is determined by working backwards for the values and costs you will pay to create the $1.2M Paper Lot value.

The same process noted above should be applied to each subsequent phase of lot value creation to ensure that there is enough value & profit to support the next level of Lot value and level of finish.

Hope this helps. Please feel free to reach out to me and I can provide you with some snap shots of an Excel pro forma that I have built to run these analysis.