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Unformatted text preview: 2 Land value = ? Based on “Best & Highest Use” I. DCF Approach
(Fisher, Lentz, and Tse) The first step in the DCF approach to land valuation is to estimate all the cash flows associated with the land at issue before and after development.
Before development, the land needs maintenance and the corresponding cost is C which is assumed to grow at some constant growth rate c. After development to the highest and best use, the property on the land site will generate rental income which when assessed at the time of valuation is NOI. NOI is assumed to grow at a constant growth rate g. The development cost of the land which includes the construction cost is R and again is assumed to grow at a constant rate of r. DCF Approach
C a sh F low NOI at time t = NOI egt
Construction Cost at time t = R ert Maintenance Cost at time t = C ect Value of Land = ?
R @r C @c N OI @ g C ost of Ca pit a l = k NOI = Net Operating Income of Building at the time of Valuation (t = 0) g = Constant Growth Rate of NOI R = Construction Cost r = Constant Growth Rate of Construction Cost C = Maintenance Cost of Undeveloped Land c = Constant Growth Rate of Maintenance Cost T = Time of Development t = Time Constraint for Development N = Building Life k = cost of capital 0 T τ Τ+Ν T im e DCF Contd
Value of the land V can be directly estimated by subtracting all the costs associated with the land from the expected future net operating income that can be generated after development. V = PV of all future NOI after construction
– PV of all Mainten...
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This note was uploaded on 09/06/2010 for the course FINA FINA0805 taught by Professor Tse during the Spring '09 term at HKU.
- Spring '09