Project type is defined by the number of phases and the use or non-use of real estate options, the result of which is the presence or non-presence of residual land. Number of phases and real estate options are two of the land development components. Decisions and negotiations made relative to these components have an effect on project profitability.
The model allows for one-step analysis of subdivisions with one, two, and three phases; or analysis of an unlimited number of phases one phase at a time. As such, the model can be used to estimate the value of land options as well as project profit under various phasing alternatives.
The illustrations and text below provide a break down of each of the model's seven possible subdivision scenarios.
A one phase subdivision is the easiest project type to model. As the illustration points out, land options and residual land are non-issues when dealing with a one phase project. The developer simply purchases vacant land, improves the land, and sells lots. End of story.
A two phase project is a bit more complex because it, by definition, will have a land option or residual land, but not both. If there is no option, the developer purchases all the land up front - all the land meaning the land to be used for both phase one and two. Consequently, in this event, the land to be developed in the future as phase two is residual land.
If a land option is negotiated for the phase two land by the developer and landowner, the developer has the option to - or not to - purchase the phase two land in the future. In this scenario there is no residual land because the land contemplated for phase two is still owned by the landowner.
Generally the developer prefers to have an option, for obvious reasons. If phase one goes poorly, for whatever reason, he or she can bail. And then there is the carrying cost of land that will not be developed until some point in the future. Sometimes a land option is good for the landowner as well. He or she may not want all the cash in one tax year, preferring instead to stretch out the income. Often, however, the landowner wants the cash - so the value of the option can be an issue. Using 'what-if' analysis on the land development component project type, the model can be used to estimate option value.
A three phase subdivision is the most complex project type to model because it can have multiple combinations of option/no option, residual land/no residual land. There can be no options with residual land (column 1), there can be an option with residual land (column 2), an option with no residual land is possible (column 3), and there can be multiple options and no residual land (column 4).
Again, 'what-if' analysis on the land development component project type can provide an idea of option value. It follows that the greater the number of phases, the more important options become.
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