A residual land value analysis estimates the value of land by subtracting development costs from market value. It can be done after a development has been built but is usually done before a development takes place. Such an analysis is sometimes performed prior to a rezoning or commitment to redevelopment to understand the implications of land use regulation, development potential or both.
Economists or planners undertaking residual land value analysis apply a methodology for obtaining cost estimates of developing a parcel of land as well as for estimating sales price or lease rates. Methodologies differ from place to place. Assuming the studied parcel has not yet been developed, cost estimates are sometimes derived from comparable recent developments that have been built out. Rents and prices are sometimes derived from actual sales and rental figures from developments similar to those assumed in the analysis.
Because a project in a residual land value analysis usually precedes both construction and approval of even a development plan, many assumptions must be made about the potential development. Commonly, the analysis will assume a build-out at or near the build-out potential allowed by zoning district, general plan or development plan. The analysts must make assumptions about the time frame for the build-out because they will have an effect on cost estimates for construction, sales and lease rates.
A residual land value analysis is a theoretical analysis based on a set of assumptions that may change over time and conditions. For these reasons, it is sometimes used more as a comparison between alternatives than an absolute figure for a certain action.
The residual land value analysis helps determine land value and the value of various development potentials. For a city contemplating a zoning change, it helps officials understand the economic impact and economic feasibility of proposed changes. It may help them determine the extent of development concessions or public benefit contributions the developer would be expected to make in return for zoning approvals.