What is the difference between a Development Feasibility and a Development Feasibility Valuation?

The Development Feasibility Valuation (DFV) process can be performed on any asset use type, size or location. It applies to Partial Development (where some or all of existing structure(s) are retained), Ground Up Development and Assembled Ground Up Development. A DFV has two primary, very different, yet complimentary elements…

The Development Feasibility… and The Valuation.

A Development Feasibility defines with certainty and support probable unit yields in a development.

“unit” might be a residential apartment or condo, a bed in an Assisted Living or Health Facility, a space in a storage facility, a room in a hotel, Gross or Net Usable square foot in retail, warehouse, distribution, office or other type of commercial use….and or any combination of these.

There are exceptions … but in most cases Zoning Ordinance will provide the information needed to define the configuration and density of use type or combination of uses that are available for a given piece of real estate. A developer may have in house staff to determine unit yields but conventionally a land use attorney or architect planner or both are hired to do this. No matter who or what entity performs the yield feasibility the accuracy of same is necessarily predicated on the accuracy of a site plan guided by Ordinance that will consider and show:

After parking and footprint are established, floor plans and number of floors can be established. Once these are determined probable unit yields will be revealed. (Should be noted here that an engineer may need to be engaged, even at an early-stage informal feasibility, for questions regarding load and grade.)

So now you have unit yields. Sounds easy but is much more complicated and nuanced than can reasonably be explained or outlined in a blog.
What’s next … the yields have to be monetized to determine …
THE VALUE(S) OF THOSE YIELDS?

The Valuation is the monetization of unit yields.

Knowing with some certainty what the unit yields are of a particular use(s) is great … but there are two huge pieces missing from this:

1. The Value of the Asset before the Development (Current “as is” Development Value)
2. The Value of the Asset after the Development (Finished Fully Absorbed Value)

From an Investment and Return standpoint the most valuable uses are conventionally chosen as the sought Development Scenarios. But which is “the most valuable”? To answer this question the Finished Fully Absorbed Value (the Market Value of the product once completed and fully leased and or sold) for each development scenario candidate has to be determined. This value can be determined from a Cap Rate Analysis, a Cash on Cash Analysis, a Net Present Value Analysis, an Internal Rate of Return Analysis … combinations of 2 or more of these…all guided by Regional Return Tolerances or Expectations.

Once the Highest and Best Use Finished Fully Absorbed Value has been determined … all aged soft and hard costs associated with getting to this Value have to be deducted from it. The result of this reveals a number we refer to as Unearned Equity (UE). From UE a buffer (percentage of labor, material and borrowing costs) and regionally accepted ROI (varies depending on location and use … and represents the Return for risk/time taken and expense disbursed/anticipated expense to garner approval) are deducted. The balance … is Current “as is” Development Value.

When you put this all together you have the primary need to knows for every buyer and seller…

• Highest and Best Development Scenario and or Added Value Strategy
• the Value of the Finished Fully Absorbed Product
• the Value (s) of the asset before it was/is developed or improved

… aka … you have a DEVELOPMENT FEASIBILITY VALUATION.

To our knowledge The Walters Group is the only independent CRE Brokerage and Advisory in our region that specializes in and offers Development Feasibility Valuation Services.

Conventionally, when we Broker an asset that has had a DFV performed on it…sale proceeds are within 5% of the Current “as is” Development Value identified within the DFV.

Typically, a DFV reveals a Current “as is” Development Value (CDV) that is double a conventional Appraisal Value. There are cases where we have revealed and supported CDV to be 4x greater than Appraisal Value.