Read the information below regarding the development potential of an undeveloped parcel of land and the market data. Answer the following:
Calculate the purchase price you would offer for the acquisition of the undeveloped parcel of property
upon receipt of approval of final construction drawings and a record plat.
Provide an analysis of the financial risks associated with each of the acquisition scenarios. Your final recommendations and supporting documentation will be in the form of a report (minimum of five (5) pages). The report should also include a summary of investment ratios, returns, and financial risks associated with your acquisition
YOUR UNDEVELOPED PARCEL OF LAND A.B. Mayberry is the owner of a parcel of land in Virginia containing approximately 450 acres. The Mayberry property is a zoned agricultural cluster that allows one estate lot per five (5) acres if public water and sewer are available to the property. The cluster provision requires that a minimum of 85% of the property area must be set aside in a conservatory lot, a minimum of three (3) acres must be set aside for community amenities, and that each estate lot be a minimum of 25,000 square feet. Assume that 20% of the land area to be developed with estate lots will be utilized for public roadways. Mr. Mayberry will be retaining the conservatory lot. Based on the aforesaid, you should calculate that a maximum of 89 estate lots are achievable. 450 Acres 85% 382.5 Acres 67.5 Acres 3.0 Acres 64.5 Acres 20% 12.9 Acres 51.6 Acres 25,000 Min Lot Area 89 Estate Lots Conservatory Lot Developable Land Community Amenities Roads Estate Lots The current housing market will support a valuation of $357,500 per estate lot with all supporting infrastructure in place and local impact fees prepaid. This valuation assumes payment of a separate amenity fee of $20,000 per lot to cover the cost of providing a community pool and clubhouse within the community. The Developer estimates commissions and closing costs to be three percent (3%) of gross revenue from lot sales (excludes separate amenity fee). Annual house sales have averaged 24 homes per community per year. Home sale price appreciation has averaged four percent (4%) per annum and cost escalation has averaged three percent (3%) over the past five (5) years. Local economists see the house sales pace and annual house price appreciation rate continuing for the next 5-7 years based on local population and employment growth projections. You have agreed with Mr. Mayberry in your Purchase and Sale Agreement that you would have three (3) months to study the feasibility of developing his property (at a cost of approximately $50,000) and that closing would be subject to the approval of your final construction plans (estimated to cost $300,000 and require twelve (12) months for design, review, and approval) and issuance of development permits (estimated to cost $30,000 and require three (3) months after approval of final construction plans). Land closing costs are estimated to be $150,000 with subsequent real estate taxes estimated to be the current real estate tax rate of one percent (1%) times the escalated value of the finished lots remaining each year. Impact fees of $30,000 per lot (a fixed amount that is not subject to an overhead fee) are due at the time of issuance of a building permit on each lot. You have agreed with the Builders purchasing the lots that you would pay the impact fees at each lot closing. The initial cost estimate for the installation of the infrastructure for the lots is $13,500,000 spread evenly over 12 months. Construction of the community pool and clubhouse is anticipated to require six (6) months to complete at a cost of $2,000,000. You have agreed with your builders to commence construction of these amenities immediately after the first lot closing. A cost contingency of ten percent (10%) of all direct costs and an anticipated cost escalation of three percent (3%) shall be utilized for this initial proforma. The developer shall receive five percent (5%) of all direct costs except impact fees and land costs to cover their overheads as well as general and administrative costs. The developer also expects to earn a minimum profit of ten percent (10%) of net revenue after payment of commissions and closing costs. The developer expects that they will be able to obtain a loan covering the lesser of 65% of direct costs and land costs or 65% of the net present value of future revenue at a rate of five percent (5%) per annum. The remaining 35% of costs are paid from equity provided by "friends and family" at a guaranteed return rate of 12%. The lender is expected to charge a fee of one percent (1%) of the loan amount to originate the four-year loan. Legal costs as well as closing and recording costs for the loan are expected to total one-half of one percent (0.5%). The lender will require a loan payment of 90% of all net revenue received by the developer until the loan is paid in full. Determine the price you would offer Mr. Mayberry for his 450-acre property less the conservatory lot which Mr. Mayberry will retain given the above assumptions? What is the impact on your valuation if direct costs escalate at a rate of five percent (5%) at the same time the house price appreciation rate drops to one percent (1%)? YOUR UNDEVELOPED PARCEL OF LAND A.B. Mayberry is the owner of a parcel of land in Virginia containing approximately 450 acres. The Mayberry property is a zoned agricultural cluster that allows one estate lot per five (5) acres if public water and sewer are available to the property. The cluster provision requires that a minimum of 85% of the property area must be set aside in a conservatory lot, a minimum of three (3) acres must be set aside for community amenities, and that each estate lot be a minimum of 25,000 square feet. Assume that 20% of the land area to be developed with estate lots will be utilized for public roadways. Mr. Mayberry will be retaining the conservatory lot. Based on the aforesaid, you should calculate that a maximum of 89 estate lots are achievable. 450 Acres 85% 382.5 Acres 67.5 Acres 3.0 Acres 64.5 Acres 20% 12.9 Acres 51.6 Acres 25,000 Min Lot Area 89 Estate Lots Conservatory Lot Developable Land Community Amenities Roads Estate Lots The current housing market will support a valuation of $357,500 per estate lot with all supporting infrastructure in place and local impact fees prepaid. This valuation assumes payment of a separate amenity fee of $20,000 per lot to cover the cost of providing a community pool and clubhouse within the community. The Developer estimates commissions and closing costs to be three percent (3%) of gross revenue from lot sales (excludes separate amenity fee). Annual house sales have averaged 24 homes per community per year. Home sale price appreciation has averaged four percent (4%) per annum and cost escalation has averaged three percent (3%) over the past five (5) years. Local economists see the house sales pace and annual house price appreciation rate continuing for the next 5-7 years based on local population and employment growth projections. You have agreed with Mr. Mayberry in your Purchase and Sale Agreement that you would have three (3) months to study the feasibility of developing his property (at a cost of approximately $50,000) and that closing would be subject to the approval of your final construction plans (estimated to cost $300,000 and require twelve (12) months for design, review, and approval) and issuance of development permits (estimated to cost $30,000 and require three (3) months after approval of final construction plans). Land closing costs are estimated to be $150,000 with subsequent real estate taxes estimated to be the current real estate tax rate of one percent (1%) times the escalated value of the finished lots remaining each year. Impact fees of $30,000 per lot (a fixed amount that is not subject to an overhead fee) are due at the time of issuance of a building permit on each lot. You have agreed with the Builders purchasing the lots that you would pay the impact fees at each lot closing. The initial cost estimate for the installation of the infrastructure for the lots is $13,500,000 spread evenly over 12 months. Construction of the community pool and clubhouse is anticipated to require six (6) months to complete at a cost of $2,000,000. You have agreed with your builders to commence construction of these amenities immediately after the first lot closing. A cost contingency of ten percent (10%) of all direct costs and an anticipated cost escalation of three percent (3%) shall be utilized for this initial proforma. The developer shall receive five percent (5%) of all direct costs except impact fees and land costs to cover their overheads as well as general and administrative costs. The developer also expects to earn a minimum profit of ten percent (10%) of net revenue after payment of commissions and closing costs. The developer expects that they will be able to obtain a loan covering the lesser of 65% of direct costs and land costs or 65% of the net present value of future revenue at a rate of five percent (5%) per annum. The remaining 35% of costs are paid from equity provided by "friends and family" at a guaranteed return rate of 12%. The lender is expected to charge a fee of one percent (1%) of the loan amount to originate the four-year loan. Legal costs as well as closing and recording costs for the loan are expected to total one-half of one percent (0.5%). The lender will require a loan payment of 90% of all net revenue received by the developer until the loan is paid in full. Determine the price you would offer Mr. Mayberry for his 450-acre property less the conservatory lot which Mr. Mayberry will retain given the above assumptions? What is the impact on your valuation if direct costs escalate at a rate of five percent (5%) at the same time the house price appreciation rate drops to one percent (1%)
