Development Site - a development site is a property valued primarily for what can be built on it rather than what it currently earns, because the land's development potential exceeds the value of the existing structure and its income

Income-producing property - An income-producing property is a property valued based on the rental income it generates, where the value is in the cash flow, not the development potential.

In NYC, every property has two potential valuations: what it's worth as a development site, and what it's worth as an income-producing property. Brokers and developers run both analyses to determine which is higher, because that number determines who the buyer is and what they will pay. The income approach values the property by dividing its Net Operating Income by a market cap rate. The development site approach values the property by multiplying its total buildable square footage by a market price per buildable square foot

For an owner, the relevant question is which number is higher, the income valuation of the property, or the value of the land, and that’s how they should sell their property.

Many owners assume that because their building is occupied and cash-flowing, it will be valued on its income. But if the land value exceeds the income value, it would more likely be a development site

Example: A five-story commercial building in Midtown Manhattan sits on a 10,000 SF lot zoned R10, which carries a FAR of 10.0, meaning the lot supports 100,000 buildable SF. The building currently contains 50,000 SF and generates $3,000,000 in Net Operating Income annually.

Income approach: At a 5.5% cap rate, the income approach produces a valuation of approximately $54.5M (3,000,000 / .055)

Development site approach: If comparable development sites in that area are selling at $600 per buildable SF, the 100,000 buildable SF produces a valuation of $60M

In this scenario, the development site valuation exceeds the income valuation by about $5.5M, even though it is the exact same property, just different uses.