How to Evaluate and Compare Development Opportunities:
It is a common error to compare the projected Gross Profits of development opportunities without making use of (TVM) Time Value of Money. Not even IRR or NPV can be used as these formulae are only capable of measuring regular cash flows at regular intervals. Only XIRR and XNPV can accurately evaluate and provide the real returns that developments or projects will generate over a certain period.
The Valuation Process for Developments
Typically one would estimate the costs associated with the development, such as land purchase, geotechnical surveys, estimated costs for civils, architects fees, building costs, etc. One will also have studied what the market needs are and where the selling prices would be the best fit for the current market and positioning of the development.
Once all estimates have been collated, the valuation process would entail putting amounts and dates to these expenditure and income items. Most importantly, the type of development will largely dictate the projected Income dates, as some developments of a freehold nature will allow for periodic sales and income throughout the life-cycle of the development, whereas other type developments might only allow for income at the end of the project. When it comes to developments purely for lease type, the retained rental stock must be valued as per the typical CRE valuation models which have been automated for you by www.proppro247.com.
These amounts and expected dates will then be used to calculate the maximum cash outflow that you will have at any point, and the date sensitive XIRR and XNPV will provide you with exact returns that can be expected. You will then be able to change certain dates and test the sensitivity of the development. Most developments will have to exceed the hurdle rate multiple times to provide ample margins for funding purposes. At www.proppro247.com we have these valuation models automated for you on Web-App or Excel!