Valuation of properties under development
SummaryNCREIF’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
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.21-0038
Our featured insights
Request your Q2 2022 Lending Market Overview
The purpose of this report is to present period over period changes in lending markets across key property types for use in marking debt to market for financial reporting. The Chatham fixed and floating indices for each property type represent how coupon rates and spreads have changed over time....
Request your Q2 2022 Average Market Credit Spreads report
Credit spreads shown are averages based on market rate conclusions for independent debt valuations conducted as of June 30, 2022. The market spread for an individual loan may vary based on property and loan characteristics, including, among others, location, tenant profile, cash flow, and...
Debt Valuation Market Update Q2 2022
In this webinar Jaran and Drew will highlight the key drivers of debt valuation for second quarter 2022. They will also cover lending markets and the mark-to-market impact.
FAQ: LIBOR transition and debt valuation
Announcements made by the FCA, IBA, ISDA, and Bloomberg in 2021 stated that LIBOR’s final publication would occur on June 30, 2023. Loans indexed to LIBOR will transition to SOFR automatically following this date. In light of the announcement to discontinue LIBOR, many of our clients have...
Debt Valuation Market Update Q1 2022
In this webinar Jaran and Drew will highlight the key drivers of debt valuation for first quarter 2022. They will also cover lending markets and the mark-to-market impact.
Key takeaways: Semiannual Market Update webinar for real estate
On February 9, Chatham held our Semiannual Market Update webinar for real estate, presented by Matt Hoffman and Jackie Bowie. There was a macroeconomic update covering the U.S., U.K., and Europe, a discussion on hedging considerations and strategies, and a brief update on the IBOR transition. In...
Debt valuation methodologies for financial reporting
Debt valuation has long been a topic of debate among entities required to report fair value. Because of varied interpretations of accounting standards, methodologies for valuing debt have ranged from simply reporting the remaining principal balance to an application of complex algorithms. This...
Capital markets and accounting considerations in real estate M&A
Mergers and acquisitions involve a multitude of complexities and risks. Speed and accuracy at every stage of an acquisition is critical to not only winning the deal but also giving the transaction the best chance of financial and strategic success. Financial risk associated with the valuation of...