What to do with 45.25 acres in MN, near the St Michael Area

Question

My family has ~45 acres of land near the St Michael Area, 28 of which is tillable / build able and the rest is wetlands and/or unusable.  The land is has tax classifications of Ag Non-homestead, RVL - NHSTD, and Res -NHSTD. Zoning is part single family, part multi-family, and part industrial. I have two primary questions for investors in the St Michael, Hanover or Minneapolis areas:

1) What is the temperature of the market there? I know it was depressed along with everything else in 2008 but has since re-bounded well. Do you see it making big moves in the next year or two? (obvious declaimers about predicting the future are assumed :-)) This would likely be used for new development and be of most interest to a developer building from the ground up.

2) Assuming the family is looking to sell in the next few years, what is the best way to execute on a property this size? I have bought and sold residential properties before, but this is a bit out of my comfort zone. Commercial Agent who can broker a deal with a developer? We have gotten some rough estimates, but don't need to sell immediately.  Any special considerations for the wetlands piece (not sure of its protection status, if any)? Definitely looking to sell the whole lot in one transaction if possible.

Thanks!

Josh Collins · Answer

@Chris Wierman

If the zoning is already setup for you, that is great news.  The hardest part can be rezoning property to something other than what it's currently zoned because you never know what kind of feedback you'll get.

With that said, the best, easiest option for you is to take it to a civil engineering company to subdivide the property such that it meets local zoning requirements and to figure out how to protect the wetlands.  It's likely that a stormwater pond system will need to be implemented to clean the stormwater before it works its way into the wetland.

This will cost you some money, probably to the tune of $50k+.  The next step would be to build the improvements - grading the site, putting in the roads, putting in the sewer, water, and electric such that houses/duplexed/industrial can be developed on the property.  This is expensive and is probably where you are going to want to stop.  But maybe not.  If you own the property free and clear, you could take out a loan against the future worth of the property to do the work.

The catch is that if the market stagnates and you can't sell the lots, you're stuck with the developing costs, whatever they may be.  As @Tim Swierczek and @John Woodrich mentioned, the best way to get you to the next level in value is to do the subdividing and sell it to a developer who's going to do the roads and utilities.  But you won't get the finished lot price, you will get the subdivided price.

Price difference:

Raw land - $8-12k/acre

Subdivided Land - $25-30k/acre

Fully Developed Lot - $150-195k/acre (3 - $50-65k lots per acre) - Retail price

But if you develop the land, you can sell 3-4 lots to each of 15 builders or all of them to one builder.  That helps diversify but I wouldn't go into the full scale development until you had a commitment from enough builder to at least break even on the project.

Now, let's say the economy tanks and you can't give away the property after you subdivide the land?  I'm hoping that you could take out a mortgage on the property for $50k for the engineering and if you had to sit on the property, you could at least farm it (or rent it out to a farmer) to make enough to cover the loan payments on $50k while you wait for an upswing.  Then, when the economy comes back, you would have some of the first lots available to be able to sell to builders.  You'd have to run the numbers to decide whether you are comfortable with that, though.

Using some rough numbers, assuming the property is relatively flat, here are the costs for full development (at least in order of magnitude):

Engineering: $65K

Grading: $1.25M (stormwater ponds and road grading can get pricey)

Roads: $1.25M ($1M per mile of roads - 1.25 miles estimated)

Utilities: $200K

Land: $400K

All in: $3.165M

Developed properties: 25 acres (3 acres set aside for parks/paths/etc.) x 3 lots per acre = 75 lots.  75 lots x $50-65k per lot = $3.750M- 4.875M.

I might be heavy on the grading and light on the price per lot but this gives you some indication of the numbers.  I think it's no secret why big developers (Pulte, DRHorton, Lennar) are doing their own property development.  They can make a little margin on the lots and then more margin on the homes.  They certainly aren't buying lots for retail and you probably shouldn't expect to sell them retail either.

Feel free to DM me if you have additional questions.

John Woodrich · Answer

As Tim mentioned, your highest and best use would be to try to develop the land.  That would require a LOT of work and the feasibility may rest largely on how close you are to city services.  It can also take a LONG time to sell lots and it generally requires quite a bit of capital to improve the land to a point where you can sell improved lots.  In you post you mentioned you are looking to sell in one whole transaction so I would consider this out of the question.

In selling as as you either have to A) show a developer or interested party how they can make money to increase your price or B) list it blindly and hope someone sees value.  It is a lot easier to pitch an idea (A) to someone as it requires less due diligence on their part but you would have to do some legwork.  If you don't have time this may not be an option.  Because of the differences in zoning across your property this may be quite a bit of work especially out of the cities where it is located.

To directly answer your questions:

1. Market has been hot in general but there was an article in the paper the other day how building permits and new construction permits have significantly slowed down.  This may be in anticipation of increased interest rates.  In hindsight I would have said list it 1.5 years ago.  Look at the MLS in that area, you will see how active builders are by whether you see a lot of new construction homes available.  Any anyone speculating where the market will be in 3 years will be wrong.

2. Simple answer is to find a developer yourself or work with brokers who can find them for you.  A first step may be to contact builders who are currently working on projects in the area to gauge their interest.

Tim Swierczek · Answer

@Chris Wierman The St Michael area benefits from being close to The Elk River Otsego area which has boomed over the last 20 years, however, it is most attractive due to its price.  That being said if I owned the land I would want to maximize it in a seller's market and that is now.  You always make most if you do the development and even creating the lot splits will increase value.  I would do some research on if you can easily split the lots and get the legal done.  This will create a parcel price instead of an average price. Builders sell 1 Acer lots for 6 figures and raw land is usually in the four-figure range.  That being said, there are too many variables so know what you land vs lots would be worth, but I'm would guess the difference is tenfold or more.

What to do with 45.25 acres in MN, near the St Michael Area

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