Land

On Solid Ground

Amid a Positive Forecast, Today's Land Sales Still Require More Time and Due Diligence.

Commercial brokers are positive in their forecasts for land sales in the next year. "It should be good for land sales, with retail, industrial, and single-family home development leading the way," says Keith P. Grothaus, CCIM, SIOR, vice president of Caldwell Watson Real Estate Group in Houston.

However, the market has changed due to a greater depth of available information, more specific requirements from national developers, and more stringent environmental regulations. In some areas, a shortage of sites has led developers to reconsider locations that they would have spurned in the past. And the more complicated the site, the longer it takes to complete the deal.

Information Overload? "There's so much that can be found out just through the Internet and newspapers about demographics, traffic counts, companies and sales, what companies are hiring, what companies are firing, which ones are expanding, which ones are moving," Grothaus says, noting that this helps stem the overbuilding that has led to past market slumps.

"And you can turn to a couple other sources and know how many square feet of industrial/distribution space [are] under construction and how many single-family homes are currently under construction and how many [have sold]. Those things just weren't available five [to] 10 years ago," he says.

At the same time, the wealth of available information has increased buyer expectations. "Developers expect you to know more," says Palmer Berge, CCIM, who operates his own company from Mercer Island, Wash., near Seattle.

Most brokers agree that successfully marketing land requires knowing where to quickly and easily obtain information. While local developers interested in small sites may rely more on their own contacts, potential buyers of large sites often are national companies that are unfamiliar with the local area and need help gathering statistics.

Brokers also must be conversant in the basics of their market: demographic and traffic trends and forecasts; road and traffic signal plans; and federal, state, and local regulations.

Potential deal busters often include such issues as traffic flow and noise, access issues such as curb cuts and left-turn lanes, potential flooding and the need for water retention ponds, plus the visual impact of a development. In addition, brokers should be aware of neighborhood organizations that could upset developers' plans.

"A lot of people get all set to do things, and suddenly a homeowners' association shows up," says Larry Rothacher, CCIM, an associate broker at First Commercial Real Estate & Advisory Services in Stockton, Calif. "Or, you get this grand design for a city and then the no-growth or growth-limitations people show up."

As a result, deals can take longer than ever to formulate - and both sellers and buyers have to work harder to complete transactions. "A developer or user has to jump [over] a lot more hurdles today than he ever had to before," says Len B. Shannon III, CCIM, executive vice president of Eyster Properties in Birmingham, Ala., and author of Land: Avoiding Mistakes When Buying and Selling Commercial Land. He adds that sales that used to take three to six months now take six to 12 months to complete and the broker has to help smooth the way through the whole process. Even the most educated developer can fall into myriad pitfalls, he says.

"It's really gotten intense, much more stringent," says Tom Bothen, CCIM, assistant vice president, USAA Realty in Rosemont, Ill. And it will become more so, he predicts, particularly in larger urban areas. But, similar issues are evolving in less developed areas.

"You've got to use a lot of consultants - traffic engineers, hydrology engineers, architects," he adds. "You have to learn how to deal effectively with all the regulations," which can take longer than expected, he says. "There's a tremendous amount of work that a seller has to put in place," he adds, but, "With a lot of time and a lot of meetings your goals can be accomplished."

Lowering the Bar Less available land has lowered the bar for acceptable sites in many areas. Small infill sites are attracting retail and restaurant developers in urban areas while large agricultural sites appeal to residential developers, especially as the outer ring of towns in urban areas continues to expand.

"What were secondary markets are now becoming primary markets," says Peter Connelly, CCIM, an associate broker at Evans Butler Realty in Melbourne, Fla. For instance, one area north of downtown Orlando, Fla., that was remote 10 years ago now is the focus of office and residential development, he says.

But land parcels that previously wouldn't rate a second look often come with problems, such as environmental issues or community opposition. Such sites require even more due diligence on the broker's part. "The broker has got to become more educated. He's got to understand land development more now because of the risks," Shannon says.

To protect his clients, Shannon walks them through the process. This may include working with numerous governmental bodies at the local, state, and federal levels. And even if no environmental or opposition issues exist, buyers may be required to provide infrastructure. "The buyer may have to widen the road or put a traffic light up as a result of the impact of his development," he says. "All those things cost money."

Environmental Awareness In addition, a broader interpretation of environmental issues also has helped to complicate land sales. Environmental issues have expanded to include wetlands, drainage, land disturbance, and endangered species, according to Shannon.

"I'm working with a contaminated site, almost a brownfield, that would have been just bypassed before," Berge says.

Just being a brownfield need not necessarily work against marketing a property. Bill Bussey, CCIM, vice president of retail site selection and development at Grubb & Ellis/Paramount Properties in Grand Rapids, Mich., secured a brownfield redevelopment designation from the Michigan Department of Environmental Quality for a 30-acre site in Muskegon, Mich., that had been the site of a metal foundry. That provided the land purchasers and developers - including Home Depot and a food store - with a credit for 10 percent of the project's total costs, excluding land costs, toward the state's single-business tax, a credit that can be used all at once or over a period of up to 10 years.

"When we figured out what we could do, we were ecstatic," he says. "It was an incentive that helped us sell the property." The only expense was less than $4,000 - the cost of hiring an environmental engineering firm to analyze site data and fill out and submit forms to the state.

Wetlands have become a bigger development issue, Grothaus says. "I didn't even know that word when I started in the business in the early '80s," he says.

The complexity that wetlands can add to a site's sale was underlined when Roger A. Edwards, CCIM, senior vice president of CB Richard Ellis in Pittsburgh, handled the sale of a 250-acre tract to a Texas-based shopping center developer. "This has literally been a case study of all the obstacles that must be overcome," he says, "and the process that must be gone through to develop a site today in a manner that is sensitive to numerous special interest groups and yet is economically feasible in spite of the additional time and costs required to comply with all the regulatory bodies involved.

"It's a very desirable location because of the demographics, the access, and the tract's size," he says. "The tenants, all of whom we had lined up, wanted to be there."

The sale and all of the necessary approvals, which took more than two years, required tax-increment-financing applications with the county, city, and school district for infrastructure financing; state and federal highway departments to relocate a road and construct a new intersection; and the involvement of Pennsylvania's environmental department, the U.S. Environmental Protection Agency, the U.S. Interior Department's Fish and Wildlife Service, and the Army Corps of Engineers to move and reconstruct wetlands.

Sometimes environmental considerations affect a site's size. Water retention ponds often have to be included on retail sites to handle water runoff from parking lots. Developers may have to include more green space, berming, and trees to screen a retail site from nearby residential areas, Bothen notes. "So, the developer ends up with a site that's somewhat smaller than originally anticipated," he says.

Considering the User
Regulations and development incentives affect transactions regardless of a parcel's size. However, size does limit a site's appeal for certain uses and brokers should tailor their presentations accordingly.

Infill Sites. "Developers are going back to some land that was previously overlooked because of difficulty with the terrain or with municipalities or whatever," Berge says. "In many areas they simply say there will be no growth or growth will be limited to certain areas. That's when you're forced into infill [sites]."

But the focus on infill sites can be driven by the lack of land availability rather than growth restrictions.

"There's a tremendous amount of infill going on in the Chicago area," Bothen says. These sites range in size from as little as an acre for residential construction in the city to 90 to 500 acres on abandoned industrial sites farther out, he says.

"Typically there are good services, good transportation access, and a reasonably good labor pool around those areas so those infill sites can be attractive for retail or manufacturing," he says. In addition, some cities will provide tax abatements or remediation assistance or other incentives for such sites, he says.

Large-Site Users. Potential buyers of large sites often are national developers from outside the area. These include national homebuilders and retirement community developers of 1,000-acre to 5,000-acre parcels that often are developed as master-planned communities as well as time-share and resort/conference-center developers of 50- to 100-acre parcels, Connelly says. Master-planned developments or communities, once limited to states such as Arizona, California, Florida, and Texas, now can be found almost everywhere, he notes.

Brokers must present a solid overview of current conditions, as well as forecasts to these buyers. "You want to give as much data as possible in your presentations," he says.

For instance, Connelly begins with a map of Florida and then presents a map of the county showing the major roads leading to the property and its proximity to airports, ports, rivers, and the ocean. Other helpful materials include maps locating nearby developments that are similar in size.

"You have to assume that your potential buyer is not familiar with the area so you really want to get into a description of what drives the marketplace," he says.

This could include the price range of nearby homes, proposed highway expansions that would make the property more accessible, and demographic and employment characteristics and projections, including income projections. "It's possible that you could show that income levels are growing faster than inflation," Connelly notes.

Retail Strategies. Retail developers often are attracted to large tracts of land, especially as national retail chains move into small, more secondary markets.

"All the major retail users have the criteria of what they're looking for pretty well-defined," Grothaus says. The top five things they look for are population - they need a certain number of people in a geographical area; income - different retailers want different income levels; high traffic counts - a lot of cars driving by that site on a given day; easy access on and off the property; and proximity to major intersections."

Knowing where the competition is located also affects purchase decisions, especially in the fast-food business. "Wendy's likes to see a nearby McDonald's doing X amount of volume in business every day," Grothaus says. "That means the sales are already there. What other retailers or restaurants ... already are experiencing justifies their going there. There's plenty of dollars, plenty of lunch business."

Talking to residents also can offer ideas in certain markets. "People see different needs," notes Robert L. Smith Jr., CCIM, vice president of Lockard Development in Waterloo, Iowa. "Maybe there's a need for an easily accessed fast-food restaurant. You can never get too many perspectives."

Armed with the right information, a broker can show that a property will give a retailer or restaurant an edge in an area that soon will meet the developer's target. "I've sold sites to grocery stores at locations where traffic counts were lower than what they look for," Grothaus says. "But all the other criteria were there - plenty of people, not much competition, good incomes, people driving four miles to get their groceries. The market just hadn't matured yet."

Smith says he works closely with the Iowa Department of Transportation, following its plans for the completion of new roads and the expansion of existing roads, including the placement of new stoplights.

His company purchased a site when it still was used for farming because he knew the city was bringing in a waterline. "There were a lot of things happening that made sense for us to purchase it," Smith says. "I'm a full believer in the capabilities of the Internet but there are still some things that are better to get a perspective from people."

Harvesting Farmland Many large-site users, especially residential developers, want to buy agricultural land. The sale of farmland for development often is directed geographically toward the land closest to a town or city and then toward the least productive land.

In California's agriculturally rich Central Valley, which produces most of the nation's lettuce, broccoli, cauliflower, and celery, "The development path is to the lesser soils out to the north and northeast," says Brian Rianda, CCIM, who runs his own company in Salinas, Calif.

"The development is still occurring adjacent to cities because it's felt that's the best place for it to occur rather than out in the middle of farmland where it breaks the land up and then it's suddenly subdivision property," he says. "Salinas is a town that's growing rapidly and I handle some of the land purchases on the periphery. It's a good business if you can do it because you don't have zoning problems and entitlement problems. There's not much for sale, but I don't have much competition."

Row cropland sales he has handled regularly top $1 million and have reached as high as $14.9 million, with per-acre prices ranging from $4,000 to $22,000.

As president of the agriculture land conservancy for Monterey County, south of San Francisco, Rianda tries to protect some of that area's best farmlands from development. But while farmland, when it comes on the market, sells for $35,000 an acre, land sold for development is fast approaching $100,000 an acre - "certainly more than row crop value even though that is the most expensive farmland on the continent." These parcels, ranging in size from 50 to 300 acres, are developed mostly for residential use, with some retail included on the larger parcels.

"We're getting a lot of spillover from Silicon Valley," he says. "We're not getting the industry, but we're getting the people."

Northeast of San Francisco, Sacramento has been growing, taking in more nearby towns as part of its metropolitan area, Rothacher says. "Roseville is now part and parcel of Sacramento and 10 to 20 miles past Roseville hundreds of homes, including Del Webb's second Sun City, are going up in the town of Lincoln."

"We're very busy now," Rothacher says. "Within the past year we've received a number of inquiries from people all over the United States who want to look at land."

But while some areas are trying to slow - if not halt - the sale and development of large agricultural parcels, "Areas that were considered secondary choices five to 10 years ago have become more pro-development as they've seen adjoining areas increase their tax bases," Connelly says. "Now they're looking to increase their development activity and increase their tax bases."

Closing the Deal Once brokers have found the appropriate users for land parcels, they and their buyers must pull all the pieces together.

Completing a sale often is predicated on the buyer first obtaining all the required permits and approvals so that development can proceed, Shannon says. "We tell clients, if this is their first land purchase, they really need to have a building permit in hand or, if not, to talk to the appropriate persons to make sure they understand what they are going to have to do to develop a piece of property."

"Part of the challenge is you don't always know what you're going to need until you start applying for permits," Bothen adds.

"Retailers generally make it a practice not to buy a piece of land until they get a full building permit," Shannon says. That includes curb cuts, signage, and storm drainage. If they have a building permit in hand, they'll close on a piece of property.

"If you are trying to provide your client with a high level of service, you need to be aware of all these different moving parts that are out there," he says. "Once you make a mistake in land and get stuck with a piece of land you can't build on, you'll probably get stuck with it for a very long time."

Jerry DeMuth

Jerry DeMuth is a free-lance writer based in Chicago. He has written for CIRE about land sales and commercial real estate financing.

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