Valuing Land

I'd love to hear everyone's thought on valuing land or valuing land if there is a vacant building on it.

Do you just go by sales comparables?
Do you focus on what the allowed buildable sf is?
Are there any other approaches?
If there is a vacant building on it, do you take the buildable SF and then subtract demo costs?

 
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It really depends on whether the land is in an attractive location for future development or not. Land is usually the last input you are solving to based on your yield/return requirement. Depending on your development program, your product type will support a certain level of cash flow which will allow you to pay a certain amount to maintain the same yield level. In urban markets, office usually can support the highest land value, then multi, etc.

I like to see what the model tells me and then comp that off of other recent land trades on both a $/PSF dirt basis and a $/unit or $/NRSF basis. Where construction costs are today, I usually end up with a very low land cost that I can "afford" in my model relative to the comps.

 

Land is priced on highest and best use. Once you know what the highest and best use is and the costs to deliver such a building, you can solve to the yield or target return you would need to justify the investment. All other cost inputs become more or less locked at this point, and your only input left becomes the land price.

Highest and best use analysis takes expertise in a given market, and knowledge of local zoning regulations and entitlements. You must quantify all costs involved and timing of those costs (and needed for rezoning or approvals) to be able to back into the “big picture” and eventually your land price. If highest and best use is the product type that the vacant structure was originally designed for, you could potentially keep the structure / bones and retrofit and lease up. Whether you can do this and get the rates that leading assets in that submarket are getting is another question. If it’s a two story asset and a high rise makes the most sense, then you price the cost to demo into your overall equation to get that site to a pad ready site.

The big unknown a lot of the time is infrastructure. For this reason, we will solve to what we can pay for a pad ready site meaning all utility connections are in place and offsites aren’t required. I view land price and infrastructure as one bucket of costs actually—more infrastructure required upfront reduces the price the land can be acquired for, and vice versa. Hope this helps!

 

Question on buildable SF....

Assume you have a 2,000 SF parcel of land that has a 5 FAR by right, but if you pay 500K and then are allowed to get a density bonus for a 9 FAR.

Can the value of the land be based on (18K buildable SF * avg buildable SF comp)-$500K to get the density bonus?

If so, how does that change how you look at buildable SF comps? Do you only look for people who have achieved density bonus increases and what they paid for the land, or is the buildable SF still just based on the FAR by right? (Not sure if that makes sense)

 

An FAR bonus could certainly allow you to pay more for a piece of land. But figuring out the eligibility and exact cost of that takes a few extra steps so I am typically lazy and just look at "by right" FAR.

Comp sets are also typically not very detailed so it's hard to tell if the bonus program was around when the comp took place, did the buyer buy a little extra FAR or max it out, etc...

 

can someone share color on how to get data on setbacks, FAR, etc?

if you are backing into your basis for land, that means you know what hard cost, soft costs, etc will be. would kindly appreciate if folks can expand on this part of the development process since most developers usually want more FAR or more density for their projects and to me, this process comes after you already know a lot about the land you are acquiring.

Array
 

If you Google valuing farmland, there are some really great resources. It seems like state to state there are major variations. I'm assuming that has to do with property demand for that state, farmable months, temperature, etc. There is even a good white paper about a potential bubble in price from the St. Louis Fed. Just read a bunch of that stuff and talk about some of the arguments for and against the idea of a farmland asset bubble. I would think that knowing a little bit about the subsidy arrangement with the government would be a good idea, i.e. - what crops get the highest subsidies, whether or not PE firms could apply for subsidies (favorable tax shields via revenue reporting, LLCs, a PE shop operating under different umbrellas), and maybe even what type of political environment could affect farmland valuation. I know that when the "Farm Bill" and other legislation gets hampered by govt shutdowns and our "awesome" congress, it could definitely cause issues for farmers, grocers, distributors, etc. Just thinking out loud, as I don't have a lot of experience here. I do know that my grandfather farmed corn one season in the 70's, and the govt has been paying him a subsidy since then to not grow anymore corn... weird.

"Decide what to be and go be it." - The Avett Brothers
 

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