Investment Performance Return - Redevelopment/Multiple Investments in Same Property

[Tom Ryan]

Hi all,

I'm working on tracking the performance of a real estate asset by using the Modified Dietz method, and I have a question concerning a tricky investment where one parcel of land is used for a certain purpose for a few years and is then sold, developed, and repurchased. The hypothetical scenario is:

I purchase a plot of land on a dense city block in the year 2000 for $100,000 and use the land to operate a surface parking lot. In 2005, I sell my parcel of land for $300,000 to a developer who needs my parcel in order to develop an office building on the entire block. In addition to the $300,000 sale price that I receive, I am also granted an option to purchase the underground parking garage that will be constructed in the new building from the developer once his building is complete, AND the sale price on the garage will be the construction cost of the garage. The developer finishes his building in 2007 and I repurchase the garage at that time for $5,000,000 with my own equity. Within a month I obtain a loan from the bank for $7,000,000, as the actual fair market value of the garage is appraised at $10,000,000. Therefore, I have purchased the garage and used none of my own equity. In fact, I've also pocketed loan proceeds of $2M.

My question to the forum is: Would you view the initial $100K land purchase and $300K sale between 2000-2005 as a separate investment cycle from the underground garage repurchase in 2007? In terms of tracking the investment performance, would you separate the two investments and track returns separately or keep them on the same horizon?

A few of my colleagues think the returns should be calculated separately. My only issue with this is that then the garage repurchase involves zero equity since I am able to finance the garage for more than the purchase price. Then the return is infinity. Or say I assume the underground garage is purchased for $1, then the return on that investment will be ridiculously high and less useful since it is difficult to compare to most investments that take place in the rest of the real estate market. My thinking is that the surface lot sale in 2005 is linked to the repurchase in 2007, and I should calculate performance returns on one timeline since I was only able to purchase the garage at construction cost due to the terms set forth in the surface lot sale of 2005. What does everyone think??