What land value must be captured in the build-to-suit pro forma to ensure profit?

To ensure profit in a build-to-suit (BTS) development, the land value captured in the pro forma must be carefully aligned with total project cost, projected rental income, and the targeted resale price (or yield). The land value should not only reflect its market cost but also contribute to overall return expectations while maintaining feasibility for both tenant lease terms and investor resale pricing.

1. Land Cost as a Percentage of Total Development Cost

• Ideally, land cost should not exceed 20%–30% of the total BTS development cost, including construction, approvals, and finance.
  
• For office, retail, or logistics BTS projects, staying within this threshold ensures that lease rental requirements remain competitive and market-aligned.
  
• If land costs are too high, the developer must either reduce build cost, increase lease rates, or accept lower margins—all of which strain project viability.
  

2. Implied Land Value in Cap Rate-Based Exit

• To determine the minimum land value captured, reverse-calculate from the resale price using the capitalization rate:
  
  • Resale Value = Net Operating Income (NOI) / Cap Rate
    
• Subtract hard costs (construction, fit-out, finance, soft costs) from this value to identify the land’s residual value.
  
• For example, if the projected resale value is ₹10 crore and development costs are ₹7 crore, the land must capture ₹3 crore in value for profit realization.
  

3. Land Value per Square Foot of Built-Up Area

• Calculate land cost per square foot of buildable area and compare it to acceptable thresholds based on market lease rates.
  
• In most markets, land cost per sq ft should not exceed 25%–35% of capitalized rent per sq ft.
  
• This metric ensures that the rent required to support land value aligns with tenant affordability and investor IRR expectations.
  

4. Land Yield on Rent-Backed Cash Flow

• Express land value as a yield on the rental income:
  
  • Land Yield = Net Rent / Land Cost
    
• Target a land yield of at least 8%–10%, ensuring the land component is not overburdening the project’s financial viability.
  
• A higher land yield provides buffer room in case of cost overruns or lease delays.
  

5. Developer Profit Margin and Exit Scenario

• The pro forma should aim for a minimum profit margin of 18%–25 % on total project cost, after capturing land value.
  
• To meet this, the land value must support:
  
  • The desired resale price
    
  • Return on equity (ROE) for capital invested.
    
  • Lease structuring that doesn’t exceed market rent benchmarks
    
• If land is undervalued in the pro forma, the developer may lose margin; if overvalued, leasing or resale risk increases.
  

In summary, the land value captured in the BTS pro forma must be high enough to generate profit after development costs but still low enough to allow market-feasible lease rates and an attractive resale yield. This balance is central to a financially viable and exit-ready build-to-suit project.