1. Zoning: You need to know the basics of land use, zoning, height restriction, allowable density, parking, ingress, egress and the impact of the official plan on your site. Does the existing zoning allow you to do what you envision? The site may require a rezoning and OP amendment in which event it could take 18 months to two years or more for the approval process, a very costly proposition. 2. Survey & Appraisal: You need an up-to-date survey of the site to determine the exact measurements, boundaries, right-of-ways and/or private lanes.
An appraisal and/or a consulting firm may have completed an analysis of the site.
Spend some time with an architect and/or a private planner who can teach you the basics. Learn how to access the planning office and to use the various cities’ or townships’ websites to acquire zoning and other information. Then speak to the appropriate planner for further clarification.
3. Coverage: The key element in your analysis is to determine how much density the site will yield under its current zoning and height restriction to warrant the acquisition price or will it require a re-zoning and an OP amendment. And if so, would the city and neighbourhood support it. Density means how many s.f. of GFA (gross floor area) will the site yield. It’s not as simple as taking a 25,000 s.f. site and a density of four times for a yield of 100,000 s.f. There are many other considerations that affect density such as height, setbacks, step backs, light angular planes, and others such as streetscape, neighbourhood integrity and residents concerns or objections to the proposal. 4. Acquisition Cost: Once you assume what the likely coverage might be, you are now in a position to calculate your land acquisition costs. Simply divide the asking price by the density to arrive at a dollar value per square foot of GFA. Adverse soil conditions will add to the cost. There are other costs associated with the acquisition that will increase the cost, such as legal, transfer and other fees, including soil tests. 5. Market Price For Built Project : Your next step is to determine the correct market value per square foot for a new build as it relates to the site and neighbourhood. This calculation is critical, so do your research. There are various research programs in addition to TREB that your Broker may have. If not, you’ll need them otherwise you’ll spend a lot of wasted time and energy making calls to capture this data. 6 – 10. Justifying the Acquisition Cost: Armed with the above, you are now in a position to make an assumption as to the price you can afford to pay. To determine the value versus the asking price, break it down per square foot.
a) Determine the total hard costs on a square foot basis to build out the project. Hard costs are essentially excavation, footings, bricks, cement, labour, machinery, and a number of other construction elements.
b) Determine the soft costs. Soft costs include carrying costs, architect, planning and lawyer’s fees, application costs, development levies, real estate fees, to name a few, along with several other costs such as landscaping,
c) Land cost. per square foot of GFA
d) Market value per square
Calculation of Potential Profit:
The following costs per square foot of GFA were used. These costs will change depending upon the area, site location, the quality of the build out, and time frame.
Costs:
Land: $50/s.f. Hard: $220/s.f. Soft: $70/s.f. Total: $340.00 Expected Sales Price: $450/s.f. Potential Profit- $110
Also understand that the costs are on a GFA basis. The developer builds GFA but can only sell net floor area, after deducting common areas, mechanical rooms, and certain amenities, etc. Therefore the land cost is actually higher to the developer. If the site has a commercial/retail component, the value of which may be calculated separately. You’ll need to know market retail net rental values per square foot and a certain capitalization rate that would satisfy the developer. There are certain analyses that can be used to determine this value but one of the simplest would be to use a land residual formula. Calculate the cost to build the retail per square foot of GFA. Then determine the value of the retail component just as if it were fully leased on a net/net basis using the required capitalization rate. The difference would be the residual land value. However, depending upon the size of the retail component the developer may calculate it all in at the residential value. The developer may feel that the retail does not add any additional value to the site. Do not over analyze the site. Your developer knows a lot more than you do and will do their own analysis. But a good understanding of the site, its value, potential density and marketability will allow you to have a credible discussion with your buyer. PAUL LEVINE, BROKER
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COMMERCIAL ADVISORS INC.