Residual land value is a land valuation tool based on simple economic concept that the land value is the surplus after development cost and profit have been deducted from the value of the completed development.
Residual Land Value (RLV) = Value of the completed development - development costs - developer's profit
Estimating the development cost and the value of completed development are difficult and subjective in nature.
Developer's profit is the reward for taking the development risk and for initiating and facilitating the development. Developer's profit varies from market to market. In developing economies the developer would seek 30%-35% profit on gross development value.
Developer's profit is calculated either profit as % of development cost or profit as a % of development value.
RLV is very useful for testing alternative development schemes for a given parcel of land. We can calculate the RLV for various development schemes and compare it with land prices of similar sites that have been recently sold. RLV tells us is we are developing the right product on that parcel of land.
Issues with Residual Land Value
- The residual land value doesn't take the Time Value of Money into consideration.
- A small error in estimating input values (development cost & value of the completed development) can lead to a large variation (error) in the land value.
Also, you can download the Residual Land Value Workbook for free from the below link.
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Great article on residual land value, now I understood this concept very well. Thanks.
Simple explanation for residual land value. Cheers!
In fact residual land value can be used for valuation too, although it is very subjective in nature.
What about residual land value based on a target IRR?
Do you perhaps have an example of that?
Thanks. I feel better understanding than before.