Land Residual Hbu Analyzer

Required

Optional

Process

Step 1: Site Summary

Produce a bullet list:

• Location and address
• Total site area (acres and SF)
• Zoning district and key parameters (FAR, height, density, setbacks, parking)
• Environmental constraints
• Entitlement status (as-of-right vs. discretionary)
• Seller asking price (if provided)

Step 2: Identify Feasible Use Types

Default use types to test (unless zoning constrains to fewer):

1. Multifamily residential
2. Office
3. Mixed-use (retail podium + residential)
4. Industrial (if site location/zoning supports)

For each use type, verify against the four-part HBU test:

• Legally permissible: allowed under current zoning or achievable through discretionary approval
• Physically possible: site can accommodate the use (topography, access, utilities, environmental)
• Financially feasible: residual land value is positive (completed value exceeds total development cost)
• Maximally productive: produces the highest residual among feasible alternatives

Step 3: Residual Land Value Calculation (per use type)

For each feasible use type, compute the top-down residual:

A. Completed Project Value

Buildable SF = Site area * FAR (or units * avg unit SF)
Gross Potential Rent = Buildable SF * market rent/SF (or units * market rent/unit * 12)
Effective Gross Income = GPR * (1 - vacancy)
Operating Expenses = EGI * opex_ratio (by product type)
Stabilized NOI = EGI - OpEx
Completed Value = Stabilized NOI / stabilized cap rate

Cap rate note: add 25-50 bps to current market caps for cycle risk if project delivers 2-4 years out and current caps are historically tight.

B. Total Development Cost (ex-Land)

Hard costs = Buildable SF * hard_cost_per_SF (product-type and market-specific)
Soft costs = Hard costs * soft_cost_pct (25-30% typical)
Financing carry = modeled on construction duration and draw schedule
Lease-up costs = negative cash flow during absorption period
Developer profit = target_profit_margin * (hard + soft + carry)
Contingency = 5-10% of hard costs
Total Development Cost (ex-Land) = sum of above

Hard cost benchmarks MUST be product-type-specific and market-adjusted. Do not use a single $/SF across all types.

C. Residual Land Value

Residual = Completed Value - Total Development Cost (ex-Land)

If residual is negative, the use type fails the financial feasibility test.

Step 4: Entitlement Probability Adjustment

Apply probability discount based on entitlement status:

Risk-Adjusted Land Value = Residual * Entitlement Probability

Step 5: Linneman Test

Flag if land cost exceeds 15-20% of total development cost (TDC):

Land as % of TDC = Land Price / (Land Price + Total Dev Cost ex-Land)

Above 20%: developer margin compression risk. Above 25%: deal likely uneconomic unless exceptional location premium is justified.

Step 6: Comparable Land Sales Normalization

Normalize all comparable sales to $/buildable SF:

$/Buildable SF = Sale Price / (Site Area * FAR)

A $50/SF parcel at 4.0 FAR is cheaper than a $30/SF parcel at 1.5 FAR. Always normalize for density.

Step 7: Feasibility Verdict

Compare the HBU residual against:

1. Seller asking price (if provided): is the ask supportable?
2. Comparable land sales ($/buildable SF): is the residual in line with market transactions?
3. Linneman test: does the land price fit within 15-20% of TDC?

Verdict options:

• Proceed: residual exceeds asking price, Linneman test passes, HBU is clear
• Negotiate: residual supports value but below asking; specify the supportable price
• Pass: residual is negative or marginal; deal does not pencil at current pricing

Output Format

A) Site Summary -- bullet list of key site characteristics

B) HBU Analysis Matrix -- table:

C) Residual Land Value Calculation Detail -- one section per use type with full build-up: revenue assumptions, expense assumptions, cap rate, completed value, hard cost, soft cost, carry, profit, residual derivation

D) Comparable Land Sales Table:

| Comp | Address | Date | Price | Acres | $/SF Land | $/Buildable SF | Zoning | Notes | |---|---|---|---|---|---|---|---|

E) Feasibility Verdict -- 3-5 bullets: HBU recommendation, supportable land price, Linneman test result, key risks, comparison to seller ask

Red Flags & Failure Modes

1. Working forward from asking price: the residual approach works backward from stabilized value. Never reverse-engineer assumptions to justify the seller's number.
2. Ignoring entitlement risk: a rezoning-dependent residual of $10M is not worth $10M today. Apply probability discounts.
3. Using today's cap rates for delivery-year valuation: if the project delivers in 3 years, use projected cap rates at delivery, not today's compressed rates.
4. Forgetting carry costs during entitlement/pre-development: interest and opportunity cost on idle land for 12-24 months is material ($300K-$600K at 6% on a $5M parcel).
5. Comparing land $/SF without density normalization: always use $/buildable SF. Raw land $/SF is misleading across different FARs.
6. Single hard cost benchmark across product types: multifamily Type V wood-frame is fundamentally different from Type I steel/concrete office. Benchmark per product type.

Chain Notes

• Downstream: dev-proforma-engine (validated land cost feeds TDC budget), entitlement-feasibility (non-as-of-right uses route for deeper analysis)
• Related: market-memo-generator (market rents and cap rates sourced from market research)