How to find prime land to develop in Miami?

[Angel Pedroza]

Some of my developer clients are very focused on prime land to develop in Miami near the water. There are very few that I have found and I’m still looking but there is less and less land to develop. What is the best way to find the best pieces of land left in Miami where the price is not an issue?

[Barry Ruby]

Hi Angel, 

I started buying raw land to develop shopping centers about 50 years ago. Over the entire 1/2 century I have NEVER found a situation where "price is not an issue".

Zoning, density, product, price point, on site, off site, hard cost, soft cost and other expenses associated with what uses that are ultimately planned for any site all dictate the amount a developer can pay for a given piece of property.

Land cost is one of the most flexible variables a developer has to play with (unlike, cost of funds, construction and permitting costs). My approach to finding the price that can/should be paid for any planned piece of land is to work backward from determining the 100% value of the project planned to go onto the property and use the following approach to figure out how much the land cost needs to be:

1. Determine the total built-out retail value of the Project: If it is a "for sale product" then the use the gross sales price if it is income property, use the capitalized value of the rental income. If it is some for sale and some rental income then use both to determine retail (market value).

2. Determine and deduct a "reasonable" development profit from Market value. Reasonable should equate to the developer's assessment of the risk/reward she/he is willing to take for doing the project.

3.  Deduct commissions, closing costs, on/off site costs, hard and soft costs.

The residual number that results from the above noted drill will give you the price/value that can be paid to the landowner and represents the land cost that is supported by the project planned for that property.

Along with running these numbers, the most prudent method of purchasing the property is to structure a purchase contract that provides enough time for the developer to secure all of the permits required to build and operate the project AND all of the debt and equity capital required to fund and carry it to sell out and or reaches rent occupancy target. 

The way to determine the functions noted above is to do a detailed critical path analysis that reflects development program milestones. These milestones should be used to frame the terms and conditions of the land contract. These factors should form the basis of the land buyer's purchase offer for critical deal points such as the timing and amounts of the payment of forfeitable earnest money, the closing date and if needed payments of additional earnest money to extend the closing date if need be to allow for final permitting and secure project capital.

The last thing any developer wants is to need to meet a closing date prior to having a fully permitted and funded project. If closing is required before a project reaches that happy day of being permitted and funded, the developer stands to lose all of the time and capital it has sunk into the project  or be left with having to plead and negotiate with the seller for more time. This situation leaves the landowner/seller in complete control of the situation (and property) and places the developer at the mercy of the seller...not a good place to be at all. It is important to understand that while any contract documents commissioned by the developer (site plans, construction docs, engineering work) belongs the developer. The bad news (for the developer) is that all of the entitlement work (annexation, zoning, land use, density) runs with the land and belongs to and benefits the property and its owner.

If you have developer clients that really believe that price is not an issue you have indeed found a group of rare birds.