How to Value a "papered lot"

Question

Hey everyone, 2 questions:

#1. Can someone help me with establishing the listing price of my land? My civil engineer is almost complete with all site drawings needed to submit for utility and jurisdictional approvals. We are seeking approval to have ~40 units built on 5-6 acres in the middle of a booming area outside of the City of Charleston, SC. It is not our intention to perform any construction work ourselves. We simply want to have all approvals in place and then sell the land to a builder who will then pull all permits in his/her name. FYI, I have decided yet if it will be townhomes or apartments, however, we are zoned for both.

#2. Can someone also advise on how to attribute the revenue from the sale of land with a neighboring land owner who is interested in "partnering?" The owner of the neighboring property (similar zoning as mine) asked if we could entertain a "partnership" where I coordinate all of the above work (listed in question #1) to include use of his acreage. My acreage is 5 but ~2 buildable acres. His acreage is 1.5 but ~1 is buildable. I purchased my land a significantly lower price/acre than him. I'm therefore reluctant to attribute revenue (purchase price) sharing based on our respective acreage costs. I'm also reluctant to attribute revenue sharing based on units/acre because the overall shape of both parcels combined yields higher density if and only if the retention pond is placed on my parcel.

Thank you very much!

Mike Smith · Answer

As a builder/developer, I deal with offers on paper lots quite frequently.  Most of the time, the seller of a paper lot would like to price it at retail lot price minus the development costs, with no discount taken for the monetary and time risk involved with land development.  For example, the retail lot price is 100k and his engineer tells him it should cost 40k per lot in development costs.  So the seller wants 60k for the paper lot.  If no discount is given, I feel it's insanity to buy a paper lot at this cost.  There are so many risk factors:

1.  The development costs could be 55k instead of 40k.

2.  There could be a market correction and the retail lot price could drop.

My basic feeling is I want to make around 30% gross margin on development, so I would discount the paper lot enough to get 30% margin for going through the time/risk to develop the lot.  There are a few deals going that have been able to sell paper lots at no discount because builders are running out of lots and will basically develop with zero margin.  That's a rare exception in my opinion.

On your partnership deal, it's going to get very tricky with an outright partnership, so maybe you could work out a "management fee" on a per lot or lump sum basis.  He pays you 50k to get the project through entitlements/engineering/etc.  He pays all the hard costs on his lots and gets to keep all the lot sale revenue from his lots.  This is a much cleaner setup than a partnership, which will end up with allocation fights all over the place on this kind of deal.

Barry Ruby · Answer

@Eddie W. You need to structure the deal you see doing and allocate cost and value to the stakeholders according to the parties respective contributions

This too broad a discussion to cover here

Send me a DM if you’d like to chat

Matt Devincenzo · Answer

#1 - A local land and development oriented broker should be able to help with this one. There's likely a 'per unit' type of average in your area that combined with some site specific details will generate a pretty good estimated ARV/sale price for your analysis. This will also help with the response to #2.

#2 - So this is a multi dimensional analysis. You may choose to share expenses as a 50/50 since you each have a parcel, or could do it as a pro-rate based on acreage or unit count etc. To reconcile your combined 'better' site plan which greatly benefits the other parcel you have two options that I can think of right now. 1) Do three very basic concept plans one for each site separately, and one as a 'combined' project. Use those to identify how many units each of you have initially, and how many each gains or loses when combined. This is your opportunity to show that if he gains 10 units then there should be a 'consideration' of some sort given to you for 5 of those units. That's each of you benefitting equally from the total unit increase. 2) The other way I can see attempting to reconcile this is similar. You get an idea of the appraisal value associated with the retention pond. Let's say it's 30K per acre of storage. Then you are given consideration for the amount of his storage that you are taking on since that increases the value of his parcel without any actual payment for the use.

Also just because you have a stated % of partnership on the sale doesn't mean you can't creatively structure it with a different % for expenses etc. Maybe you decide that for the entitlements you share 50/50 but for sale it's 60/40 based on unit count etc. This may help tilt the overall value in your favor a bit. The reasoning behind the 50/50 on expenses is that you each own one site, and the costs for entitlement design doesn't scale on unit count the same as physical construction does. It's much more based on total scope that on units, hence why you each pay half.

My guess is that option 1 above is both the best and easiest to truly define since at the end of the day the additional units are really what you are both looking to achieve.

How to Value a "papered lot"

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