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fair value valuation for real estate project developments

Examination of the evaluation methods along the phases of the project to determine the market value of a project development.

During the course of the development of a real estate project there are different causes for evaluation. They usually result from financial reporting and the due diligence of the project buyer or the project seller.

When evaluating real estate project developments, the fair-value approach is gaining importance.
The fair value of a project in development is the value of the real estate object or development after it is finished (and completely rented) minus the outstanding costs, while reasonably considering the project risks.

To determine the fair value of a real estate project development the proposal includes the new DCF Method with the 3 Phases “development period“, “detail usage period“, and “remaining usage period“. In a first step the value of the finished real estate object is determined. Simply speaking Moneygram fees this value is determined from the results of the “detail usage period“ and the “remaining usage period“, discounted to the time of completion. From this number, finally, the still pending charges from the “development period“, discounted to the date of valuation, is subtracted.

For integration of the risks in determining the value of a project the following principle applies: Quantifiable risks should be shown in the cash flow, non-quantifiable risks should be shown in the discount-factor. The development risks, which no longer apply after the project is finished, in the proposed model are distinguished from the other risks. To achieve this, for the “development period“,  a development risk factor (d) must be added to the discount rate of the finished object. This risk factor becomes relevant, if at the time of evaluation risks are identified, which are only relevant during the development phase, and which no longer apply after the object is finished.

Authors: Michael Camenzind, Lukas Guy Schnider, Martin Schweizer
Masterthesis, Master of Advanced Studies in Real Estate Management HWZ, 08/2009

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