CRE 101 · deweyluong.realtor

Development Feasibility: Does the Deal Pencil Before You Buy the Dirt?

Yield on cost tells you what return a finished, leased building would produce compared to what it cost to build. Feasibility asks the harder question that comes before it: given what the land costs, what the market will actually pay in rent, and what construction really costs, should this project exist at all?

A feasibility study is not a vibe. It is five gates, and the project has to pass all five. Fail one, and the disciplined answer is to walk away, no matter how good the rendering looks.

The five gates

1. Market. Will tenants pay the rent your math needs, and how long will lease-up take? Rent is an opinion until a signed lease says otherwise. In Gwinnett, that means checking real asking and achieved rents on the actual corridor. Pleasant Hill Road retail does not price like Buford Highway, and neither prices like a spreadsheet default.
2. Physical. Does the site work? Acreage, frontage, access, topography, stormwater detention. In Gwinnett County, stormwater and access points kill more small retail deals than rent does.
3. Legal. Zoning, conditions from prior rezonings, sign ordinances, impact fees. A site zoned C-2 with a 2011 condition limiting uses is not the same site as clean C-2.
4. Financial. The yield on cost math. This is the gate most people check first and understand least.
5. Timing. Construction cost cycles, interest rates, and the 18 to 30 months between land closing and stabilized income. A deal that pencils at today's rents and rates can fail on the calendar alone.

The financial gate, in plain English: residual land value

Here is the developer's trick, and once you see it you cannot unsee it: you do not start with the land price. You end with it.

Work backwards. The finished building's stabilized NOI, divided by the return you require (your target yield on cost), gives you the maximum total budget, land included. Subtract everything it costs to build, and what is left is the most you can pay for the land. That leftover number is called the residual land value.

If the seller's asking price is above your residual land value, the deal does not pencil. At your required return, the land is worth less than the ask. Your options are exactly three: negotiate the land down, raise the income (higher rents, more leasable area), or walk away. Hope is not a fourth option.

Worked example. Every number below is assumed, for teaching. It is a realistic shape of a deal, not a real project, not a quote, and not a promise.

The project: 18,000 SF of retail on a commercial corridor site in Gwinnett County.

Step 1, stabilized income:

• Rent: $30/SF/year, triple-net. Gross potential rent = 18,000 × $30 = $540,000
• Less vacancy and credit loss at 6%: effective income = $507,600
• Less landlord non-recoverable costs (management leakage, reserves) of $27,600: stabilized NOI = $480,000

Step 2, what it costs to build, before land:

Step 3, the residual:

• Required return: say the market buys stabilized retail like this at a 6.50% cap rate (assumed for this example). Building instead of buying has to beat that by enough to pay for construction risk, lease-up risk, and time. Say a target yield on cost of 8.00%, a 150-basis-point spread.
• Max total budget = $480,000 divided by 8.00% = $6,000,000
• Residual land value = $6,000,000 − $5,577,500 = $422,500

Step 4, the verdict. The land is listed at $850,000. At that price:

• Total cost = $5,577,500 + $850,000 = $6,427,500
• Yield on cost = $480,000 divided by $6,427,500 = 7.47%, a spread of only about 97 basis points over the 6.50% exit cap
• Stabilized value at the market cap = $480,000 divided by 6.50% = $7,384,615, a margin on cost of about 14.9%, below the roughly 20% cushion most developers require for this risk

Conclusion: at $850,000 for the land, this deal does not pencil. It pencils at roughly $422,500 for the land, or if rents were higher, or the building bigger. That one page of arithmetic is the entire negotiation, before anyone hires an architect.

The sensitivity that humbles everyone

Watch what a $2/SF rent miss does. At $28/SF instead of $30:

• NOI falls to $446,160
• Max total budget = $446,160 divided by 8.00% = $5,577,000
• Residual land value = $5,577,000 − $5,577,500 = negative $500

A $2/SF optimism error did not dent the deal. It erased the entire land budget. This is why feasibility is a discipline, not a formality. Small input errors do not shrink your profit, they delete it. And the developer who stretches the rent assumption is the one who ends up owning a half-leased building and a construction loan.

The Gwinnett reality checklist

Before any land contract in Gwinnett County, a real feasibility pass confirms:

• Achieved rents, not just asking, within a mile, same corridor, same tenant class
• Zoning conditions and any use restrictions recorded against the parcel
• Access: GDOT and county curb-cut reality on state routes (Buford Hwy, Pleasant Hill, Jimmy Carter)
• Stormwater detention footprint, because it eats leasable land on small sites
• Impact fees, tap fees, and permit timelines in the current fee schedule
• Lease-up absorption: how many comparable spaces are competing for the same tenants today
• Exit: who buys a stabilized 18,000 SF center in this submarket, and at what cap rate, this week, not last cycle

The rule to keep

Feasibility is the art of killing your own deal on paper, cheaply, before the market kills it expensively. Yield on cost gives you the number. Residual land value gives you the discipline. The sensitivity check gives you the humility. Run all three, in writing, before the land contract. Every time.

Thinking about a site in Gwinnett or Metro Atlanta? Reply with the address. I will walk the five gates with you and tell you what the land is worth on your math, not the seller's. The feasibility conversation costs nothing, and it is much cheaper than the alternative.

Feasibility work like this is part of Dewey's development practice at SERHANT. Atlanta.

Túy “Dewey” Luong, CCIM | SERHANT. Georgia | 678-707-2498 | dewey.luong@serhant.com | deweyluong.realtor

Frequently asked questions

What is residual land value, in one line?

It is the most you can pay for the land after every other cost comes out of your total budget. If the ask is above it, the deal does not work at your required return. The land price is the answer to the math, not the starting point.

Do I need a full feasibility study for a small project?

You need the five gates and the residual math, in writing. On a small deal that can fit on two pages. Skipping it because the deal is small is exactly how small deals lose money.

The seller will not come down to my residual number. Now what?

Raise the income side if you honestly can, more leasable area or better rent, or walk away. Paying above residual means you accepted a lower return than the risk deserves. Somebody else overpaying for the land is not a reason for you to do the same.

Tóm tắt bằng tiếng Việt

Tính khả thi (feasibility) là bước kiểm tra trước khi mua đất: dự án có "ra số" hay không. Bài này trình bày năm cửa kiểm tra — thị trường, vật lý (địa hình, thoát nước), pháp lý (quy hoạch), tài chính và thời gian. Công cụ chính là giá trị đất thặng dư (residual land value): lấy NOI ổn định chia cho suất sinh lời yêu cầu để ra tổng ngân sách tối đa, trừ đi toàn bộ chi phí xây dựng, phần còn lại là giá đất tối đa có thể trả. Trong ví dụ minh họa tại Gwinnett (18.000 SF bán lẻ, NOI $480.000, chi phí xây dựng $5.577.500), đất chỉ đáng giá khoảng $422.500 — trong khi giá chào bán $850.000 khiến suất sinh lời trên chi phí (yield on cost) chỉ đạt 7,47%, không đủ bù rủi ro. Chỉ cần tiền thuê thấp hơn dự tính $2/SF, toàn bộ ngân sách mua đất biến mất. Kết luận: hãy để con số quyết định — đàm phán lại giá đất, tăng thu nhập, hoặc rút lui.