Hello Members,
Basically I am asking this question as I have been given the Real Estate Sector in a firm in which I am working as Analyst.
My question or dilema is that today most of the Real Estate companies enter into Land Development Agreements with the prospective seller of the land, whereby they do not pay the land price upfront but pay only a lum sum amount as security deposit to ensure that construction will be completed in due course/ time. And land owner instead gets the cut/ profit from the sale of consturcted/ build up area after deduction of all expenses by the Real Esate Company.
Now if the Real Estate Company comes to a financial instititution either for loan or approach a private equity player for equity and subsequently they show that land as their assets in respect of which they have enter into land development agreement with the land owner, and gives the security of that land.
Now question is that how the financial institution or the private equity player value this piece of land as company is not the owner of land and secondly ther e is no sale of land. Third we can not take the stamp duty rate prevelent in the state as bentchmark for the valuation of the land as these are only development rights and not actual land.
If we take the going rate for the land and than discount by 20% to 30%, even than it gives the wrong impression.
So in such situation, how we should value the land bank.
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  • Originally Posted by cayogeshgupta
    Hello Members,
    Basically I am asking this question as I have been given the Real Estate Sector in a firm in which I am working as Analyst.
    My question or dilema is that today most of the Real Estate companies enter into Land Development Agreements with the prospective seller of the land, whereby they do not pay the land price upfront but pay only a lum sum amount as security deposit to ensure that construction will be completed in due course/ time. And land owner instead gets the cut/ profit from the sale of consturcted/ build up area after deduction of all expenses by the Real Esate Company.
    Now if the Real Estate Company comes to a financial instititution either for loan or approach a private equity player for equity and subsequently they show that land as their assets in respect of which they have enter into land development agreement with the land owner, and gives the security of that land.
    Now question is that how the financial institution or the private equity player value this piece of land as company is not the owner of land and secondly ther e is no sale of land. Third we can not take the stamp duty rate prevelent in the state as bentchmark for the valuation of the land as these are only development rights and not actual land.
    If we take the going rate for the land and than discount by 20% to 30%, even than it gives the wrong impression.
    So in such situation, how we should value the land bank.




    I cant say about what other builders are doing.Here is what we do when we find that the location of land is very good and seller donot want to sell it.We make a partnership aggrement with the seller in this way

    Suppose the market value of land is 10 crore and the construction value will be approx 4 crore..so the total investment is 10 + 4 = 14 crore,so the 50% of the total investment is 7 crore which is the amount we will pay to the seller.We also form a aggrement for sale with the seller along with sale deed that give us the right to sell the property.We then sell the flats to the financers who book our flats by giving 50% in advance as booking amount.

    I cant say about what other builders do.
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  • The concept which we are discussing here is known as a Collaboration deal.

    Collaborations are very common these days and both the developer and land owner can get a good return. The reasons for this new lucrative aspect are simple. Developer does not need to pay the hefty price of land (which is first not available now and if its there then the prices are touching sky). The owner gets more revenue compared to what he can get by selling it in one go.

    Alright the procedure is simple. The FSI for the land is calculated. Now based upon projected selling price and estimated land cost we determine the percentage of the owner. The marketing rights are solely with the developer and the owner gets the revenue either through escrow or other pre agreed mean.

    The bankable rights for the land are normally with the developer however, the developer indemnifies the owner against any kind of losses. So all losses belong to developer whereas the profit is shared as per the agreed collaboration percentage.
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  • Thank u very much for your prompt reply. But the problem is that in this situation i would be valuing the land on the basis of development which is going to take place in future. Suppose if i have to lend money today to this developer against the land development right he holds than i need to know the value of land today and not on the basis of future income/ profit from the saleable area.
    Secondly i cannt lend on the basis of land prices as the developer is not holding land but land development rights.
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  • Hi thanks sir,
    I am not going to invest, but the firm in which i work do it on daily basis. So just getting some gyan on the same. Now i know how they are doing the financing of real estate companies
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