Master Planned Community Appraisal – Valuation

Definition

Master Planned Community (MPC) Appraisal – A larger project that is planned, designed, and marketed under a cohesive concept or brand. Master planned communities are a relatively new concept in Latin America but had tremendous success in some markets such as Mexico and Costa Rica in particular.

Master planned communities important because they offer security, design standards, infrastructure, reputation, and a cohesive living environment with amenities. Drawbacks include the difficulty in securing debt on such complex properties, the heavy capital requirements of developing infrastructure, particularly water and water treatment plants.

Benefits

Infrastructure – MPCs have well thought out infrastructure that includes water, high speed internet, paved roads, and flood protection. During the planning stage of MPC projects, experts can plan out infrastructure on a macro basis – which allows for them to plan for the future and anticipate the needs of the community. There are few surprises in the future – as a professionally developed MPC has likely thought of potential problems that could take place and have taken steps to mitigate them.

Security – in Latin America security is considered average – however, in MPCs the community usually has systems in place to create a security bubble around the project. This is done with fences, and guard gates to restrict entry to the community to only residents and guests. There are also cameras, patrols, and often each subdivision has its own set of security measures as well. Security is a major draw of MPCs in Latin America.

CCRs – MPCs have legal frameworks that restrict what residents can do. This includes architectural restrictions, noise restrictions, and restrictions on other activities. CCRs allow for communities to protect the standards of the community – something that often is lacking in other communities in Latin America. For example, unsightly paint jobs, remodeling or construction of unappealing or non-conforming homes is not permitted in most MPCs. In neighborhoods outside of MPCs, however, there are few restrictions – which can impact the overall appeal of a neighborhood and its property values.

Drawbacks

Major capital outlays – the major infrastructure needs of a MPC require significant capital outlays. This can be an obstacle in the development of such a project but can be overcome by phasing the project and land purchases. Further, assistance from municipalities does lessen the burden such as the ability to connect to existing municipal utilizes such as water and sewer. Sometimes, there are debt sources that can also participate in the development of MPCs, however these participants must be sophisticated and be able to loan long-term. There are few banks in Latin America which have lent in the construction and infrastructure development of MPCs.

Transportation to city – MPCs often are build on the outside of major cities and touristic hubs, where large land parcels are available for purchase. Residents of these MPCs often must travel long distances to get to the commercial business district of a city. Mitigating factors include the businesses and services available within a MPC which makes it self-sufficient. Some MPC developers install dedicated highways or roads which allow residents to travel in an express manner to the city.

Types

Touristic Master Planned Community – a master plan that is dedicated to second home use or resort use. Mexico and Costa Rica are pioneers in this type of MPC. Sometimes there are hotels, resorts, golf courses within the MPC product mix.

Golf Master Planned Community – an MPC with a golf course, which helps attract buyers, and improves the visual appeal of a master plan. Golf MPCs are also often touristic MPCs also, that hope to draw in tourists with the amenity-attraction of golf.

Planned Urban Development. A MPC that is developed within a city core (PUD) – where buildings are often demolished, and redevelopment is necessary. PUDs include significant vertical development and require special zoning permission from zoning authorities. Increased development potential through re-zoning allows for developers to purchase projects with existing construction – and create a financially viable redevelopment project.

Approaches, Relevance

Cost – usually infrastructure is relatively new, and so the cost approach is applicable.

Sales comp or market approach – this is typically done with macro lots, where an appraiser can find other macro lots in the market that are sold to developers.

Income capitalization – not typically a method used in MPC valuation.

DCF – applied via the Unit Sales approach for either lots, or units that are self-liquidating. This method can be used to determine the value of a macro-lot within the master plan or the master plan in its entirely. Often touristic master plans have different types of residential macro lots that are sold, and hotel, and resort pads that are developed and sold. The unit sales approach can be used to determine the bulk value of a master planned community.

Value Impacting Factors

Location – location of an MPC needs to be either close to an existing city (within 1hr for a commute to location) or within 3 hrs. (second home location).

Infrastructure – the level of infrastructure impacts the value of the project. Some MPCs have basic infrastructure while others have top level design, architecture, and services.

Connectivity – the size of MPCs allow for the multiple uses to generate efficiencies. If a project is self-sufficient, and has commercial uses as well as residential uses, there will be a positive impact recognized by residents. For example, a large MPC with a grocery store would be considered more attractive than one without the convenience of a grocery store.

Important Inputs

Sales prices – how quickly are prices rising? This is a key factor of MPCs, especially in the first couple phases. Usually during this time, buyers are just starting to get to know the project and can observe how the product looks. MPCs have greater appreciation than other product outside of MPCs in general.

Sales volume – how quickly is a project selling? Since MPCs are valued based on a Unit Sales Approach (DCF) – the sellout time has a major impact in value. Further, if a developer can sell quickly, he can reinvest the profits from preliminary phases into secondary and tertiary phases, thereby improving the overall trajectory of the project.

Infrastructure cost – some MPCs are locate on flat lands that have typical development costs. Other projects have major infrastructure requirements such as new sewer treatment plants, water plants, and sometimes infrastructure such as lakes, canals, and other major earthwork intensive improvements.

Recent Trends

Telecommuting – living outside of cities is become more feasible with flexible work schedules, advanced co-working technology being implemented, and automation.

Global travel impacts from pandemic – Mexico has benefited from restrictions imposed in Europe to attract North Americans to visit and buy second homes in their Touristic MPCs. Further, the more hands-off approach to the pandemic has also attracted Europeans and Australians to immigrate o Mexico on a permanent basis.

Crime and need for security – crime is a major concern in Latin America – there is a desire and need for increased levels of security. Master planned communities provide higher levels of security by means of guard gates, neighborhood watches, and security patrols.