16234 Lecture Notes - Lecture 8: Opportunity Cost, Market Capitalization, Naming Rights

Lecture 8

Hypothetical Development Method of Valuation

• Hypothetical development: is the process of deriving a land value, or price to be paid for a site which is not

developed to its highest and best use by hypothetically developing it, then systematically stripping back the

components of the development including construction costs, profit and holding costs to arrive at the value

or price to be paid for the property as a development site

• When and why is it used?

o To determine the value of land against the existing use when the existing use may not be its highest

primary adjustment being for time, location and quality of improvements

• Commercial Buildings

o Office Buildings

▪ Gross realisation is established by determining the market value of a property using

capitalisation of the net income

Gross Rent Collected – Outgoings = Net Rent

o Net Rent is capitalised at a market capitalisation rate to determine that value of the property

o Income – rent (office, retail, roof top), parking, naming rights, signage rights

o Outgoings – council rates, water rates, land tax, insurance, insurance, repairs, management fees,

planned maintenance, common power/water

Realisation

o E.g.

o One of the key issues to remember when deducing sales from the market, is the number of

dwellings in the sale block compared to the number of dwellings in your development