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Mid-Rise Symposium - Urbanizing the Avenues |
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Residual Land Value Proforma
A "proforma" is a projection of the revenues and costs associated with a project. The proforma prepared for the Mid-rise Symposium compares the economics of an 8 storey and a 25 storey residential condominium project on one of the City's Avenues.
Since all of the costs and revenues associated with each of the projects do not occur at one point in time, the various cash flows are "discounted" to arrive at a present value (ie. the sum of money at time = 0 that is equal to all of the cash flows from the project).
The "land residual" approach used in the proforma prepared for the Mid-rise Symposium adds up all of the revenues and costs associated with a project, except for the cost of the land. This approach is commonly used by developers to help them decide the maximum amount they could pay for a land parcel and still create a successful project.
Both projects are hypothetically possible, as they both generate positive residual land values. In the case of the mid-rise project, however, the residual value ($1.3 million) may not be sufficient to purchase land on most of the Avenues in Toronto.
There are two reasons why the existing landowners may choose to hold-out for more than $1.3 million.
- The first reason is that on many of the City's retail strips the existing rents from established retail are substantial; therefore, the present value of the existing rents may exceed $1.3 million.
- The second reason is that the landowner may be speculating that at some point in the future the City or the OMB will permit him/her to build a substantially larger building. The 25 storey condominium shown in the proforma would generate a residual value of almost $6 million (substantially more than the mid-rise project).
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