What to take into your next appraisal
- Model option payments, credits and extensions explicitly.
- Use the named jurisdiction’s actual approval sequence.
- Report abandonment exposure separately from the successful-project return.
Describe the approvals the project still needs
Build a jurisdiction-specific map of zoning, subdivision, environmental review, infrastructure agreements and permits relevant to the site. Name the decision-maker, submission prerequisites and appeal or expiry exposure where applicable. There is no single US entitlement timetable.
OCC guidance treats development and construction risk as part of real-estate credit assessment. For the investment model, connect each unresolved approval to the cost or acquisition commitment it controls.
Sources: Office of the Comptroller of the Currency: Commercial Real Estate Lending, version 2.0
Compare two fictional acquisition structures
Assume a $5m land price. An outright buyer pays $5m now. An option buyer pays a non-refundable $200,000 fee now, credited against the price if exercised within nine months, then pays $4.8m on exercise. Both spend $300,000 on initial studies.
Assume a negotiated three-month extension costs another $50,000 and is not credited. These terms are invented for the example, not standard US option provisions.
| Outcome | Outright cash committed | Option cash committed |
|---|---|---|
| Initial land payment and studies | $5.3m | $500,000 |
| Successful exercise without extension | $5.3m | $5.3m |
| Successful exercise after extension | $5.3m before carrying costs | $5.35m |
| Abandon before exercise | Land retained; recovery uncertain | $500,000 lost |
Cost the extra time on each structure
If the outright purchase uses $3m debt at 9% simple annual interest, a three-month approval delay adds $67,500 interest before other carrying costs. The option structure instead incurs the assumed $50,000 extension plus any study and financing costs.
Do not compare only those two charges. An extension may be unavailable, the price may escalate, or the seller may terminate if contractual conditions are not met. Record those events in the scenario.
Separate sunk cost from recoverable value
An outright buyer’s $5.3m initial outflow is not necessarily a $5.3m loss if the project fails: the land may be sold or used differently. Model an explicit recovery value, selling costs and time to recovery.
The option buyer’s lower initial exposure does not prove higher overall value. A short exercise window can force a decision before critical information arrives, and a lost option may forfeit the site entirely.
Tie the recommendation to the next evidence gate
Present successful, delayed and abandoned cases without assigning unsupported probabilities. If a probability-weighted value is used, disclose the evidence and sensitivity around those probabilities.
The committee should know the next non-refundable payment, the information expected before it and the person responsible for exercising or extending. Revisit the decision before contractual dates, not after the model’s assumed approval month passes.
Sources and further reading
- Commercial Real Estate Lending, version 2.0 Office of the Comptroller of the Currency
- Valuation of development property RICS
Published by Feasly. How we prepare our guides. Suggest a correction.
