RES exam question on Financing: maximum residual land value the developer should pay
A developer uses the residual valuation method to assess a land site. Comparable units are expected to achieve a total Gross Development Value (GDV) of $12 million. Construction costs are estimated at $3.5 million, professional fees at $500,000, and the developer requires a profit margin of 15% of GDV. What is the maximum residual land value the developer should pay?
- A$8 million
- B$7.5 million
- C$5.5 million
- D$6.2 million
Show answer & explanation
Answer
D. $6.2 million
Explanation
Residual land value = GDV − Construction − Professional fees − Developer profit. Developer profit = 15% × $12m = $1.8m. Residual = $12m − $3.5m − $0.5m − $1.8m = $6.2m. The developer should not pay more than $6.2m for the land. The residual valuation method works backwards from the completed development value to derive the maximum justifiable land acquisition cost.
Study the concept behind this question: Property Financing in Singapore: LTV, TDSR & MSR
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