As many of you know, I started my career in residential land development first as a broker and later as a principal. During that time I built my fair share of residential land development Excel pro formas, modeling returns and forecasting cash flows for my clients and investor partners.
I’ve since transitioned into the institutional side of commercial real estate investments and don’t have opportunities to model these types of deals any more, but I nonetheless still possess the skills to pound out a quick land development model in Excel when necessary.
Over the years, I’ve received numerous requests to put out a back-of-the-envelope model for developers of single-family lots. So this model is on account of those requests.
Since releasing this model several years back, I’ve made several updates to the model including the ability to now include a second phase in your analysis and the option to also model partnership-level (i.e. equity waterfall) returns.
Note: New features will end for this model at version 2.0 – I will continue to rollout bug fix updates. Since releasing this model in 2018, it has gone through 10 major updates. However, over the past year, I’ve received numerous requests for a land development model that also had the option to include vertical construction (e.g. townhomes or multiple single-family homes), as well as the ability to model non-residential land development scenarios. So I’ve since released my Land Development Model for Multi-Scenarios that is a more robust alternative to this model.
This is a basic, back-of-the-envelope model for quickly calculating the potential returns and/or estimating the land value of a prospective project. The model spits out a summary of the estimated internal rate of return and equity multiple for the project, both on an unlevered and levered basis based on various assumptions. It also calculates equity required, with or without financing, as well as calculates the absolute equity at risk (equity in before entitlements).
To start, you’ll first set whether to analyze whether the project has one or two phases. You’ll then drop in some simple land-specific inputs for each phase: land purchase price, earnest money amount, due diligence cost and length, closing month, closing costs, land size in acres, and number of to-be-entitled lots.
Next, you’ll enter entitlement assumptions (length and costs) and construction assumptions (length and cost). Finally you’ll enter assumptions related to financing (rate and loan-to-cost) plus lot sales assumptions (absorption period, finished lot sales price, and closing costs).
With your assumptions properly modeled for each phase in your analysis, the Workbook runs an analysis up to 120 months of unlevered and levered monthly cash flows. The analysis allows for up two phase of construction, however with a little tweaking you can easily adapt the model to work with more than two-phase projects.
I put together a simple video that explains the different assumptions and outputs of the model. I also talk through what the model is and isn’t (it’s a back-of-the-envelope model, not a comprehensive analysis tool). The video was created using version 1.0, before the option to include a second phase was added. Nevertheless, the methodology and assumptions are largely the same. As time permits, I’ll record an updated video to go with v1.20+.
In this video, I walk you through the most significant updates to this model since it’s initial release several years ago. Those updates include the ability to analyze up to two phases, the addition of a more robust sales and project cost forecasting module, and the inclusion of partnership-level return calculations.
To make this model accessible to everyone, it is offered on a “Pay What You’re Able” basis with no minimum (enter $0 if you’d like) or maximum (your support helps keep the content coming – typical real estate Excel models sell for $100 – $300+ per license). Just enter a price together with an email address to send the download link to, and then click ‘Continue’. If you have any questions about our “Pay What You’re Able” program or why we offer our models on this basis, please reach out to either Mike or Spencer.
We regularly update the model (see version notes) . Paid contributors to the model receive a new download link via email each time the model is updated.
About the Author: Born and raised in the Northwest United States, Spencer Burton has over 20 years of residential and commercial real estate experience. Over his career, he has underwritten $30+ billion of commercial real estate at some of the largest institutional real estate firms in the world. He is currently President and member of the founding team at Stablewood. Spencer holds a BS in International Affairs from Florida State University and a Masters in Real Estate Finance from Cornell University.
