One takes a discount off a valuation, the other a share of an open-market price after costs: compare them on the same base before you sign either.
Compare them on the same base. An option pays the landowner market value as fixed by a valuer, less a discount. A promotion agreement pays the open-market price, less sale costs and the promoter's recovered planning costs, less the promoter's share of what is left. On an illustrative site worth 10,000,000 with consent, a 15 per cent option pays 8,500,000; a 20 per cent promotion pays 8,067,200 even when the open market beats the valuation by 8 per cent. The promotion wins only if the sale beats the valuation by more than 13.5 per cent.
Worked in full in The Real Estate Development Manager by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Strategic land without consent is worth little more than its existing use. Getting it allocated and consented takes years and money the landowner usually does not want to risk. Both structures hand that risk to a developer or promoter, and both pay for it out of the uplift, but they take their reward from different numbers.
An option discount comes off a valuation. A promotion fee comes off a price after costs. A 15 per cent discount and a 20 per cent fee are not five points apart.
| Input | Value |
|---|---|
| Market value with outline consent, as the valuer would fix it | 10,000,000 |
| Option discount to market value | 15% |
| Option fee at signing, credited against the price | 100,000 |
| Planning and promotion costs, at risk | 500,000 |
| Open-market price above the valuer's figure | 8% |
| Agency and legal costs of the open-market sale | 2% |
| Promoter's share of net proceeds | 20% |
All terms are illustrative and both kinds of agreement vary widely; minimum price clauses, cost caps and the valuation assumptions often matter as much as the headline percentages. Timing and tax are ignored here: both sales are assumed to complete at the same time.
Option: landowner receives = market value × (1 − discount)
Promotion: landowner receives = (price × (1 − sale costs) − promoter's costs) × (1 − promoter's share)
Break-even price = [option proceeds ÷ (1 − share) + costs] ÷ (1 − sale costs)
Excel: =(MV*(1-Disc)/(1-Fee)+Costs)/(1-SaleCost)
Option. 10,000,000 × 85% = 8,500,000: the 100,000 fee at signing and 8,400,000 on exercise. The developer buys land worth 10,000,000 for 8,500,000, a 1,500,000 margin, 3.0 times its 500,000 of planning costs. If consent is refused it loses those costs and the 100,000 fee.
Promotion. The open market pays 10,800,000. Sale costs take 216,000 and the promoter recovers 500,000, leaving 10,084,000. The promoter's 20 per cent is 2,016,800, about 4.03 times its costs; the landowner keeps 8,067,200, 74.7 per cent of the price. It is 432,800 less than the option, despite the higher price.
Break-even. For the promotion to pay the landowner 8,500,000, the open market has to pay 11,352,041, 13.5 per cent above the valuation. Put the other way, at an 8 per cent premium the promoter's share must be no more than 15.7 per cent.
| Open market above valuation | Fee 15% | Fee 20% | Fee 25% |
|---|---|---|---|
| 0% | 7,905,000 | 7,440,000 | 6,975,000 |
| 8% | 8,571,400 | 8,067,200 | 7,563,000 |
| 15% | 9,154,500 | 8,616,000 | 8,077,500 |
| Promoter's share | Break-even price | Premium over valuation |
|---|---|---|
| 15% | 10,714,286 | 7.1% |
| 20% | 11,352,041 | 13.5% |
| 25% | 12,074,830 | 20.7% |
The case for a promotion rests on the premium: an open, competitive sale to several housebuilders, against a valuation that an option holder has every reason to argue down. Whether that premium is 0, 8 or 15 per cent is the judgement that decides the choice, and it should be made explicitly, from evidence of what competitive land sales achieved against valuations locally. At a 15 per cent fee an 8 per cent premium is enough, by 71,400.
Comparing the percentages directly: "15 per cent off against 20 per cent off, so the option is better by 5 points, 500,000 on 10,000,000." That treats both as deductions from the same 10,000,000, which gives 8,500,000 against 8,000,000. The promotion fee is taken after the promoter's costs, which the landowner also funds in effect, and the price it applies to is a different number. On the case the gap is 432,800, not 500,000, and with a 15 per cent premium it reverses.
Planning risk changes the answer as well. Under the option the landowner keeps the 100,000 fee if consent is refused; under a promotion it receives nothing. At an illustrative 60 per cent chance of consent, the expected values are 5,140,000 and 4,840,320. How to weight a price by the probability of consent is in how much to pay for land subject to planning.
The Real Estate Development Manager starts from land and the residual appraisal that values it, and the free workbook for this case holds the residual and the land diligence stages behind a consented price. The residual method itself is in how to calculate residual land value.
Commonly a share of net sale proceeds, after the promoter's planning costs and the sale costs are deducted; 15 to 25 per cent is a typical illustrative range, often with caps on recoverable costs. On an illustrative 10,800,000 sale with 500,000 of planning costs and 2 per cent sale costs, a 20 per cent share is 2,016,800 and the landowner keeps 8,067,200.
The option price is usually market value with consent, fixed by an independent valuer, less an agreed discount, illustratively 10 to 20 per cent, with the option fee credited against it. At 15 per cent on a 10,000,000 valuation the landowner receives 8,500,000 and the developer buys land worth 10,000,000, a 1,500,000 margin for 500,000 of planning cost and the 100,000 fee at risk.
The option, usually, because the landowner keeps the option fee, while under a promotion the promoter writes off its costs and the landowner receives nothing. With an illustrative 60 per cent chance of consent the option's expected value is 5,140,000 against 4,840,320 for a 20 per cent promotion with an 8 per cent open-market premium.
This article is one calculation from The Real Estate Development Manager. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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