Valuation of properties under development
Summary
NCREIF’s Valuation Committee has provided guidance on a common question we hear from our clients: “When should I recognize entrepreneurial profit in the valuation of properties under development?”If a development property is carried at cost of construction until a certain completion level or occupancy is achieved, the resultant valuation may pass unwarranted volatility onto the investment vehicle in the form of a sharp write up in value. Were the project to be sold just prior to achieving that certain completion level or occupancy, the sale price would likely reflect some of the entrepreneurial profit over the project cost to date.
More commonly, investment vehicles reporting a NAV, such as open-end funds, tend to reflect some level of that profit expectation through the development period. As there are no comps, per se, for a given property at various stages of development, the amount of value recorded over (or under) cost at any point should reflect not only the anticipated profit upon stabilization, but also the various risks remaining and the degree to which those risks have been or will be mitigated through completion.
While an associated construction loan would typically be carried at par, there may be situations under which a proper valuation would reflect an adjustment due to changing market conditions. Chatham’s Valuations team can assess your specific scenario to determine the appropriate treatment.
The recently approved Development Valuation addition to the NCREIF PREA Reporting Standards Valuation Manual can be found on page 12 here.
Questions about valuation of a property under development or the associated debt?
Contact our valuations experts
Disclaimers
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