The Developer Chronicles: Master-planned Projects
In this series, I describe master-planned projects. The discussion focuses on the difference between a one-off project and a multi-stage, multi-year planned development. I explore the factors that great development teams grapple with every day. I hope you find it of value.
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Master-planned Projects #2 Net Developable Area
What is the very first thing a developer looks at when a new listing for a development site pops up on their screen?
- The price? Maybe, although most developers don’t pay too much attention to what someone is asking.
- The location? Possibly, although many think location is only as good as the price.
- The site area? Absolutely.
The site area number becomes the cornerstone starting point for the back on an envelope financial feasibility calculation*. For a typical one-off development site – where it sits within existing roads and neighboring properties – its entire site area, all the land you are buying (whether 300,000 sqft or 3,000m2), is the Net Developable Area (NDA).
Site Area = Net Developable Area. You can develop on the whole site and sell 100% of that site. Note: that doesn’t necessarily mean you can build on the whole site, as outside town centers there are likely planning rules for example front yards and maximum building coverage.
However, now let’s bring in the master-planned project.
At a minimum, if you have to build at least one public road, then site area DOES NOT equal Net Developable Area. You are going to lose at least the area of that road and its intersections. Public roads get vested to the local government authority. We talked a lot about roads last time, click here if you missed #1 Roads. You can’t sell that land to construct houses/factories/offices or shops on top of.
What about streams and rivers? Well, normally you can’t sell those, nor the land immediately adjacent. What about space that is already zoned public open space, or as a park? You can’t use that to stick sellable plots on either. Pump stations, power transformers, public walkways, wetlands, native forests, wildlife sanctuaries – all have the potential to steel NDA from your master-planned acreage.
Yes, you might get publically reimbursed for the land that lies beneath some of these features. But more often than not, losing that land is a cost to your development.
And yes it’s more common in greenfield master-planned developments, the ones at the outer reaches of the city, or near a natural feature, than for those large brownfield master-planned inner-city sites.
Therefore, when you purchase land for a master-planned development you are buying ‘Gross Developable Area’ (GDA). Say 100 hectares. But what you can sell, the NDA, is going to be much less. After you deduct soon to be publically owned laned (like roads and parks) you might be down to 70% or 60% of GDA. That means after starting with 100 ha you might now be down to 60 ha of sellable land or ‘super-lots’. And of the land that remains, there may be private access ways and private but communally owned parks, lakes and other natural features that effectively can’t be sold as well. Then, if you have a topography rich site, for example, unusable land on steep cliffs, you might be able to include the square meterage in the sale, but effectively it has no value. We are pushing semantics a bit here but your effective NDA might now be down to 50% or less of GDA.
You mean we have purchased 100 hectares and I can only sell 50? That’s annoying!
As the GDA cloud of fog lifts above your master-planned community, revealing its true DNA, one might ponder this: not all similar sized master-planned sites are the same. No longer can you look at site area alone to determine the sellable footprint of the houses/factories/shops or offices you intend to place-make. You must convert the gross area of what you are buying to the net area of what you can sell, and base your financial decisions thereupon.
Further not all NDA is the same, let’s discuss that a little more:
- Topography. A flat site almost always lends itself to maximizing NDA. You don’t have pesky hills and valleys to navigate, or to expensively bulldoze into shape. A geographically featureless site also helps maximize NDA. No need to run roads around ponds and over streams and between blocks of native bush. Of course, property development is never so straight forward, and there are occasional exceptions. If you are developing an equestrian estate of 20,000m2 lifestyle blocks, you are going to have a higher percentage NDA, by virtue simply of not requiring as proportionally much road. In that case, the odd river or hill, may not make any difference at all.
- Density. If you are developing medium density housing with a retail town center surrounded by apartments then road efficiency is extremely important. Every little slope of the land is going to be in the way. And every square yard of additional NDA is a nugget that needs to be mined.
- Zoning quality can be more important than quantity (they tell me). And it’s not always the size of our NDA that is important. In a master-planned development the site could have multiple planning zones. This is where more NDA in the higher zoned area, at the expense of a greater loss in a lower zoned area may make sense. NDA for apartments zoned land could be more profitable compared to NDA for single family standalone housing. Similarly, light industrial small plots might be more profitable than heavy industrial large plots.
- Existing value. NDA on a north facing slope (southern hemisphere) – all things else equal – is going to be more valuable than the southern face. NDA with stunning vistas is better than being blocked by the neighbor. NDA close to amenity, more desirable than further away. NDA on the lakeside more prized than a street behind. One ha of $1000 per m2 land ($10m) is more valuable than two ha of $300 per m2 land ($6m).
- Creating value. Look at an aerial photo of Metro Phoenix, Arizona. Zoom out a bit, what do you see interspersed between many the cul-de-sacs?………..( I can wait while you do this, I have plenty of time)………Some green. Oh and some blue. Yes, plenty of golf courses and quite a few lakes. Now since it all started out as desert, and in most places, relatively flat desert, this on first glance looks like a blatant disregard for what I described above: maximizing NDA. Of course, in the developers profit-maximizing wisdom replacing perfectly good NDA for housing with unsellable (and costly to maintain) fairways and water ski lanes has increased the total land value (at least I assume it worked out that way). Click here to look at some other novel ways of transforming NDA in order to improve profit (or at least create a marketing twist).
- Destroying value. Take an extreme situation, place some big ole city power transmission lines in your development and watch the value of the NDA underneath and nearby drop.
So as our discussion has progressed it’s getting to the point where hard cash is taking over the importance of hard space. Where your site does have a significant tilt towards such value variances. an improved approach to maximizing total Net Developable Area is to maximize total Net Developable Land Value (NDLV).
But it goes even further than that. You really want to determine the Net Developable Profit Potential. What’s the difference between NDLV and NDPP ?
It’s the cost.
Once you factor in all the costs of trying to create more Net Developable Land Value, you may find you are financially better off to leave the country club features out of the master-plan. In those circumstances, it is easy to go full circle, and you end up with our initial prime consideration: to extract more NDA.
We’ll talk more about the dollars and cents of NDA in the next edition of The Developers Chronicles: Master-planned Projects #3 Feasibilities.
Foot Notes
*The back of the envelope calc involves some key planning rules and a few ‘rules of thumb’ (each to their own) and might go like this:
[3000m2 site area] x [maximum building coverage 50%] = 1500m2
[4 levels high] x [1500m2 ] = 6000m2
6000m2 / [80m2 apartment size incl common area] = 75 units
[75 units] x [$20k per unit land value] = $1,500,000 purchase price.
Cheers
Andrew Crosby
The DC: Master-planned Projects – All published editions.
#1 Roads
#2 Net Developable Area
#3 Feasibilities
#4 Stages
#5 Team Collaboration
#6 Architectural Design
#7 Scale Thinking
#8 Selling the Dream Location
P.S.
Now in this blurred world of social media versus professional media, my opinion versus my employer(s), salary versus side-hustle, middle of the business day versus 11pm on a Sunday evening, it can all get a bit confusing. So, here is my value proposition, and both complement and benefit each other.
- If you have a development site that you would like to sell some or all of, to develop yourselves, or to build houses then Universal Homes www.universal.co.nz might be able to help. We focus on delivering value-for-money homes in the ‘relatively affordable’ range, like the 1300 home westhills.co.nz or the 600 plus homes we have built at Hobsonville Point, or the thousands of others around Auckland over the last 60 years. Message me on LinkedIn at any time
linkedin.com/in/ajcrosby . - If you want to learn more about real estate / property development and a continuous improvement approach, with books and courses in development management to maximize profit and decrease risk then visit www.developmentprofit.com
