How to calculate value add from RTI permits in Los Angeles?

Question

I'm a real estate agent and have 2 investors who are ready to sell their investment properties (duplex & 12 units) and both have ready to issue permits with the city of Los Angeles (the duplex has RIT for 2 more units, and the 12 unit apt has RTI for 5 more units). I know how to comp the properties but how much value do RTI permits add to the property? The duplex client says $150K for the 2 extra units but I don't want to put it on the market and have it sit for a long time. Any advice is appreciated. Thank you!

Will Barnard · Answer

Two ways to do this in my opinion. First is to take the cost of the permit process which includes the plans (arch and structural design), permit processing and permit fees together, Then calculate the value of the time it took to do all of this (perhaps the holding costs) and you now have your cost to get the RTI. From there, a reasonable profit should be added for the effort.

Option 2 would be to take the potential gross rental income added by the new units, less the operating costs to get your new future potential NOI. Determine the going cap rate and do the math for the total future value. That said, your buyers will not pay for the future value as they would have no upside for all their effort to construct the units so you need to adjust accordingly. This is why it is more accurate to use option 1 above.

Where are the units, I could be interested if the price is right?