Considering the current cap rate environment, what are some solid covered land plays you have seen in the market in terms of operating businesses, product type, attributes, etc., that can be pulled off with relatively low investment capital? Mainly thinking about high growth markets (Austin, Denver, etc.) where there will be significant land appreciation in the next 5-10 years.
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Car washes. Way too overlooked. Have an acquaintance whose family bought a car wash in West Hollywood and are converting it to a badass mixed use development, retail podium under apartments. It was a true covered land play too.. their debt was more than covered by the NOI before they even went for entitlements.
Dry cleaners if you know good environmental consultants.
Car washes and dry cleaners both sound scary from an environmental perspective...
I like parking lots.
+1 on that. Contaminated soils cost 100$ a yard to haul off. Nasty little bit there. Good environmental consultants don't stop the EPA and local DOE from putting a boot in your ass. Also, when you put spoils in a truck, they'll swell a certain %, so your 1 yard of compacted soil becomes 1.5, 100$ a yard in the ground turns into 150$ outside.
This would probably be a strong play where the local DOE DGAF though.
Old commodity industrial buildings in the path of gentrification.
Why?
EDIT: this is the TL;DR version of comment below.
Cash Flow near/mid-term -> Reposition to creative office -> lease to a bunch of hipsters/weird startup for exorbitant rent -> $$$Profit.
I don't feel great about giving a $1,000,000 build out allowance to a "weird startup."
And institutional buyers will ding you for a weak credit rent roll.
Old commodity industrial buildings (light industrial) in the path of gentrification (infill) aren't going to be that big. So there's a pretty good chance the targeted exit isn't going to be institutional capital. See: El Segundo.
EDIT: Also, the rent spread between creative office vs. industrial and the cost savings of 'creative office' you can achieve from doing this (as opposed to slugging a ton of capital in a multi-story CBD office building) will make the risk profile much more compelling.
You having any luck getting things upzoned for multi in El Segundo (or heard of anyone who has)? Close to zero institutional product in that pocket which I can't see lasting forever...
Just to clarify, you mean multi like multi tenant office/industrial, or multi family?
Multifamily; there is gobs of creative office and multi tenant office/industrial there.
Yep - I figured but just wanted to make sure before I went on a tangent. The creative office as you mentioned has been pretty lucrative, there's a lot of that there and we have done several projects in that pocket which has been really successful. The multifamily side as I'm sure you know is a completely different story. We had a site lined up but it was barely too close to the airport for us to get an overlay (broker had pitched to us that it wouldn't be a problem, but it was... had to drop the deal). We have another site under control that I think we have a good shot at getting the nod on, but too early for me to disclose/give any certainty on. I've heard that there are a couple of groups circling the waters, but there just hasn't been a huge push given the easy money that's been in the creative office and industrial market there. In a lot of cases, the land is more valuable for office/industrial given where the rents have gone even if you do get it zoned for multi depending on the density.
So short answer, haven't been lucky so far, hoping that changes this year, nothing definitive yet though.
EDIT: One thing I forgot to mention, we have had more issues with environmental than the zoning board directly, FWIW. I guess it's chicken or the egg though, zoning won't clear us until the environmental is squeaky clean, and we can't really know what the scope is of the environmental work until zoning gives the OK.
Local light industrial facilities tend to have high occupancy (this is empirical) and thus, stable CF and the quality of more than covering your DS. This allows one to "buy down their basis" while you await the city reforms / up zoning / overlay.
Communities want to knock down old, ugly industrial as soon it becomes an eye sore. Expanding "hip" neighborhoods/ office areas eat away at this brand of product for that reason.
In order for communities to beautify the old industrial stock up zoning must be passed.
The result is ownership of land that has a higher and better use and (ideally) a low land basis as you've been CFing.
Doesn't have to be industrial, could be anything ugly but in the path of growth. Don't want to give too much juice, but you get the basic idea.
Thoughts on bars?
Truck yards
There's plenty of dinky retail centers scattered everywhere around very good markets in LA/SF/SD/OC due to incumbent owners having an impossibly low property tax basis. Know a family office in particular that pursue those types of crappy retail centers in LA. They can afford to take the cash flow for 5 years while they let all the retail vacate during the entitlement process
We see a lot of mobile home parks being scraped for redevelopment, while the buyer operates it while getting the entitlements
Dog park bar - requires minimal building on 2-5 acres of land. All you need is a little trailer from which to serve beverages and appetizers.
Driving range - I know top golf is domibating this space, but I went to a regular range in north Houston with a bar, kids playground, and had classic rock playing. It felt a lot Iike top golf, but with $7 ball buckets, reasonably priced booze, a genuinely fun atmosphere, the ability to hit off real grass, and without the oontz oontz kind of clubby atmosphere. The key here is just being a little creative and deliberate with the programming.
Generally speaking, how would one go about valuing a covered land play? Is it simply the after debt payment NOI you receive until the time you knock down a building less the costs you incur during your predevelopment period?
I currently work in MHC acquisitions and we are thinking of how to quantify a covered land play TO A NEXT BUYER as we are not developers.
To provide some context - we are buying some parks that are in the path of growth but well down the road (at least 10 years if not more). So we are trying to think of it from the perspective of what a next buyer would or could potentially pay us. Thoughts?
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