Archive for February, 2010

Got Dirt? Land as Investment – Part II

Friday, February 26th, 2010

Got Dirt? Land as Investment – Part II

In Part I we discussed the three main categories of land available now. In Part II we review the reasons land is attractive to investors and how you can estimate potential profit:
o Land that is purchased raw and then entitled has good potential for appreciation. Vocal environmental groups have made development more difficult and there are more costly hurdles in place to develop a parcel. The NIMBYs (not in my back yard) dominate development hearings. The end result of this is a diminished supply of entitled development land. When the construction industry resumes activity, demand for entitled land will resume with it.
o Land is simple to own. You don’t need leasing brokers, property managers, tenants, or a maintenance staff.
o The secret for buying land is relatively simple – follow the roads, airports and commuter rails. Roads are extended, widened, and new roads are built for a reason. With transportation an essential part of what makes land valuable, chances are that property located on or very near major transportation routes will be a good investment.
o Compared to developing buildings on land parcels (horizontal development), developing the land itself (called vertical development) is relatively inexpensive and less risky.
Land value is determined primarily by property zoning, the location of the property, and the condition of the land itself. Typically, land suitable for dense development (apartments, hotels, high-rise offices, etc) will command the highest prices. That is followed by retail, office and industrial zoning, with single family and agricultural at the lower end of the pricing range.

When estimating future value of the land, because there is a dearth of recent comparable land sales on which to base your estimate, you can use the “back door” approach to valuation often used by the developers who will be the buyers for vacant land. A pro forma is developed as though the planned development was already completed, and a projected net operating income (NOI) is estimated. By then applying an estimated market capitalization rate for that kind of building to the NOI, a value for the completely developed project is estimated. All hard and soft construction costs and the developer’s profit margin are deducted from this estimated value to arrive at the land value. Another way to estimate values is to go back and look at 2003-2005 closed transactions for similar land parcels. Those sales, because they are “pre-hyped up real estate market” pricing, are indicative of conservative estimates for future value.
Susan Lawrence is president of Real Estate Strategies, Inc. based in Winter Park, Florida. The company’s experts assist commercial real estate owners, trusts, lenders, private equity companies and foundations in evaluating and developing strategies for commercial real estate investments. Additional information on qualifications and services may be found by visiting www.restrategies.net.

Got Dirt? Land as Investment – Part I

Friday, February 26th, 2010

Got Dirt? Land as Investment – Part I

Many real estate investors have never considered land as an investment, but there are others who will not invest in anything else. Over previous decades, huge fortunes have been made by landowners. The question is whether land can be a profitable investment in these economically tough time, and the answer is a definitely yes.

There are several categories of land now available for investment at deeply discounted prices. It’s a veritable land smorgasbord out there.

Land investors are not the same as land speculators, who basically pursue a “buy and flip” strategy. It is the land speculators who bequeathed us the first category of available land. Between 2005 until mid-2007, the land flippers settled like kamikaze locusts over every available parcel, buying under the “greater fool” theory of investment and driving up land prices. These speculators were aided and abetted by local banks that failed to underwrite either the borrower’s capabilities or land value. As a result, there are numerous parcels of land now offered at deep discounts by desperate speculators or their lenders.

The second category of available land is the tracts that were purchased, and perhaps partially improved, by developers without the deep pockets needed to weather a down-turn. Many of these tracts have fundamentally sound development plans. You may have seen the developers thinly disguised pleas for help in advertisements seeking equity investors for a project. Those pleas for equity are often not successful; the developer is simply trying to hold on to his own equity investment and have some prospect for future return. Land investors can often buy the entire development tract at a bargain price.

The last category, often overlooked, is the land parcels where there is no financial pressure to sell. It could be surplus land owned by government entities, corporations, heirs or individuals. The owners just want to sell, and in order to compete with the land inventory dumped on the market by distressed loans or investors, and stalled developments, they have competitively priced the land. Sometimes, these sellers will even finance a purchase.

In the next post, I’ll offer some reasons that investors like buying land, and different ways of predicting land’s future value.

Susan Lawrence is president of Real Estate Strategies, Inc. based in Winter Park, Florida. The company’s experts assist commercial real estate owners, trusts, lenders, private equity companies and foundations in evaluating and developing strategies for commercial real estate investments. Additional information on qualifications and services may be found by visiting www.restrategies.net.

15% Capital Gains Tax Rate To Fade Into History

Monday, February 15th, 2010

Welcome to Real Estate Strategies, Inc. first blog.  We will blog tips and helpful information on our website dedicated to making ownership of commercial real estate less complicated and more profitable.

Let’s say you own commercial real estate that you have owned for five or more years and you want to sell it to fund retirement (or something else) using the profit from the sale.  But with the market so slow, a sale this year probably means a sizeable discount on your property’s value and hence, your profit.  So, you have been sitting on the sidelines.

Sales of most commercial real estate are subject to long term capital gains tax (tax on the profit made over the investment, or basis, in the property).If you have a low basis (the property cost plus acquisition expenses) in the real estate, it may make sense to sell in 2010.

Here’s why.  Although real estate lobbyists are trying hard to prevent it from happening, it is highly unlikely that Congress will allow the current 15% rate on gain on sale to remain in place when it expires on January 1, 2011. The sheer scale of our national debt indicates taxes of any sort will increase. The best we can hope for appears to be minimal (say 5%) annual increases in the capital gains tax rate until it gets close to 40%. If you wait until next year, you will likely pay the government at least 20% of your profits – maybe more.

Delaying your sale another year is a gamble on what Congress might do to capital gains rates (a bad gamble!) and on whether real estate valuations will increase in the near term (another bad gamble!).  Think long and hard about those gambles and whether they are worth the risk.

Susan Lawrence is president of Real Estate Strategies, Inc. based in Winter Park, Florida.  The company’s experts assist commercial real estate owners, trusts, lenders, private equity companies and foundations in evaluating and developing strategies for commercial real estate investments. Additional information on qualifications and services may be found by visiting www.restrategies.net.