All, specific details withheld for anonymity, but currently we've received an unsolicited request to purchase a portion of currently owned property, as the solicitor's property is directly adjacent, and abuts, my companies current property. Purchaser wants to expand and develop this portion if we go through with the sale.
The question is this: as this part of the land that we own is currently completely undeveloped, how would you go about coming up with a disposition price? Do you unequivocally do a residual value model as if you were to develop the parcel yourself? Or, are there quick 'back-of-the-envelope' methods to arrive at a value to at least drive the conversation forward?
First time doing specific land analysis like this, so any input from experienced land guys would be helpful.
I'd find out what they can build there (when combined with their current holdings adjacent) and back into a land value based on that. Not sure if you have a relationship with the potential buyer, but if they won't share their plans with you directly (maybe they'd want to JV where you could contribute the land?) you can probably find out from an architect and/or landuse attorney what they can build on their land, and what the incremental development potential would be if they owned your land as well. The land is likely going to be much more valuable to them than to someone who just wanted to purchase your land so market value based on what you can build on it could be underselling yourself. Obviously they are going to know that you know it's worth more to them than a typical market sale, so they probably won't pay all the way up, but you should at least know their value so you don't sell yourself short.
Should have mentioned, they have provided preliminary development plans that would be an extension of the assets on their current adjacent property. Subject to some zoning changes, I have a general idea of how many buildings/units/density etc.
So, that being said you would value the land as if you were to develop and build the identical proposed plans as a part of your own?
Well I guess it depends if they are maximizing value of the land. If they have an office campus and are just planning on building a couple more buildings to integrate into that campus - but the zoning also allows for 500 apartment units that would be worth multiples of that to a multi-family developer, I wouldn't peg my value to their office development.
My point is that if their development is really highest and best use, there are likely some synergies available to them by adding your parcel to theirs that increases value beyond what it is worth on its own. Whether that involves achieving additional density (through FAR bonus, more efficient orientation on the site, parking, etc.), operational (there are going to be some expense savings on their combined project vs. if you or another 3rd party were to build and operate a standalone building), or cap rate (larger development could push them into the "institutional" size realm and lead to cap rate compression versus the smaller development). You want to quantify what this additional value is so you understand what this building is worth to them, not just the market value of the land to a 3rd party.
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I've done land analysis before, the most comprehensive approach is a DCF based on a vertical build out and an exit, discounted at vertical levered return to get a PV of the land at the time of vertical build, which in itself is discounted back to today at a higher discount rate since horizontal improvements are generally higher risk since there's no operating cash flowing asset (it's land...) adjusted for the horizontal infra improvements. That takes awhile to do and there are a shit # of assumptions going into it. Also, you have to see what your property land is zoned for to see what you can build
I'd do two things and see how those values compare.
1) Build a full development proforma and solve for land value to achieve +10% unlevered return 2) Obtain FAR (buildable RSF) comps from brokers
You could sell them unused FAR from the rest of your site too...
All, thanks for the responses.
bolo up in regards to HBU, what they are proposing the purchase for is the same asset class as our land, and their as their adjacent property (think MF development).
bolo up VolatilitySmile Two of our current property boundaries are cut off by a town reservoir on one side and a major interstate on another side. So, kind of surrounded no matter how you slice it. Also, on the side with the reservoir, there is a sewer easement. I think they just really want the land to expand their own site because they think there's a business case for it. FAR bonus would be helpful but not sure how much we'd be able to squeak out there given the existing property limitations.
zacksc11 you lost me but i'll come back to that when I have more energy. Any chance you can explain vertical build out vs. horizontal build out? Simple difference between leveling land and building the structure?
I'd say: "You're going to be able to build 30,000 more RSF using my site and its FAR. If you sell that at a 6 cap you're conservatively going to make $4 million extra, so I want $2 million. Or you can be stuck with a weird, smaller project after I turn the site into a landfill. Your call."
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