Residual land value is a metric that equals the value of the land, after all costs of developing have been subtracted. For example, if an investor purchased land for $500,000 and spent $1 million building an office park, which they then sold for $2 million, the residual value of the land would be $500,000.

Another method of calculating the residual land value is called the land residual technique. Instead of actually using the investor/developer’s cost of improving the land, any buildings or structures are instead valued at their replacement cost or depreciated value. And, instead of using the sale price of the building, this calculation instead uses the appraised value off the land. Unlike the traditional residual land value calculation, which may be best for investors interested in developing raw land, the land residual technique is generally superior for investors who are considering purchasing a property with improvements and who are considering demolishing them to make way for new development.

Residual land value is calculated by subtracting the cost of development from the sale price of the land. For example, if an investor purchased land for $500,000 and spent $1 million building an office park, which they then sold for $2 million, the residual value of the land would be $500,000.

Another technique for calculating land residual value includes subtracting a pre-calculated developer profit from the cost of development in order to determine the maximum amount that an investor should pay for land for development. For example, if an investor wanted to purchase land and knew that they would need to invest $1 million to improve the land and sell it, they could enter in a specific equity multiple into an excel formula in order to determine the most they should pay for the land in order to generate that profit (assuming they also estimated a sale price).

The main factor that influences residual land value in commercial real estate is the cost of development. This includes the cost of materials, labor, and other costs associated with improving the land. Additionally, the expected sale price of the land after development is also a factor, as it will determine the potential profit that can be made from the development. Finally, investors may also use profit-oriented techniques to calculate land residual value, such as entering a specific equity multiple into an excel formula in order to determine the most they should pay for the land in order to generate a profit.

Understanding residual land value in commercial real estate can help investors make more informed decisions when purchasing land for development. By calculating the residual land value, investors can determine the maximum amount they should pay for land in order to generate a desired profit. This can help investors avoid overpaying for land and ensure that they are able to generate a return on their investment. Additionally, understanding residual land value can help investors determine the value of their land after development costs have been subtracted. This can help investors understand the true value of their investment and make more informed decisions when selling their land.

The main risk associated with residual land value in commercial real estate is that the estimated sale price of the property may not be accurate. If the sale price is lower than expected, the investor may not be able to recoup their costs and may end up with a loss. Additionally, the cost of development may be higher than expected, which could also lead to a loss. Finally, the market conditions may change, making it difficult to sell the property at the estimated sale price.

Source: Residual Land Value in Commercial Real Estate

Small businesses can use residual land value to their advantage in commercial real estate by using the land residual technique. This technique values any buildings or structures at their replacement cost or depreciated value, and uses the appraised value of the land instead of the sale price of the building. This method is generally superior for investors who are considering purchasing a property with improvements and who are considering demolishing them to make way for new development. Additionally, small businesses can use the profit-oriented technique for calculating land residual value. This technique involves subtracting a pre-calculated developer profit from the cost of development in order to determine the maximum amount that an investor should pay for land for development.