Land Development Components

Note that although land cost and land value are related, they are not one in the same. It is the combination and interplay of all the other land development components that sets the amount an investor is willing to pay for undeveloped land. It follows then that land cost tends toward land value when all other components, including investor return expectations, are market driven.

The total number of lots, sale price per lot, sale costs, closing costs, developer fees, vacant land costs, development cost per lot, permitting costs and extraordinary costs are "above gross profit" components, while length of the construction period, absorption, seller financing (if any), builder deposits (if any), number of phases, land options (if any), interest rate, interest rate trend and lender loan requirements are "below gross profit" components. It is the combination and quantities of, and the presence or non-presence of these “below gross profit” components that determine a project’s interest cost.

It is important to note that the gross profit of any given project will be the same no matter what the combination and quantities of “below gross profit” components and regardless of the presence or non-presence of “below gross profit” components. The point here - making decisions about a land subdivision based on gross profit projections alone (e.g. absent a reliable estimate of total project interest cost) is not a good idea.

A major strength of the land development model lies in its ability to calculate profitability below the gross profit level. This is to say, the LDM calculates total project interest cost. Interest costs vary substantially with and without the presence of options, residual land, seller financing, and builder deposits. Interest cost also varies depending on interest rates, the direction of interest rates, length of the construction period, and most importantly, absorption.