Profits In Predevelopment Land, by Dan Tomlin, Jr.

 Tomlin Investments, Dallas, Texas

The elements for success in predevelopment land are simple; the execution is complex, detailed, and demanding.

Since the beginning of time, land has been the primary source of wealth and power.  Today, land continues to be one of the most prize and prudent investments, if it is careful researched and astutely managed.  Creating extraordinary value has always been the result of extraordinary vision and hard work.   Finding the right land investment takes a little of both.

History has shown that cities tend to grown in one predominant direction.  Bu studying the history of a city as well as current demographics, it becomes apparent where the future growth will occur.

For our company the ideal land investment is that which exists in a growth corridor that will be developed within three to five years.  Such a parcel is called predevelopment land.

In the United States predevelopment land is a stable investment.   Its profit potential is consistently and significantly greater than any potential risk.  It can be one of the best investments for the patient, sophisticated investor.  But for the land to realize its maximum potential value, it must exist in a rapidly growing metropolitan area, be thoroughly researched, correctly purchased, actively managed, and aggressively marketed at the appropriate time.

Philosophy of our company 

Our company’s philosophy is this; put the investor’s interests first, and make every effort to minize risk and maximize profit.  Minimizing risk is the key.  Risk factors can be minimized by initiating in-depth property research and analysis prior to acquisition.  Then, with creative land management and an energetic resale program, risks can be reduced even further.  

Our company believes property should be acquired in growth areas with a proven ability to sustain growth.  Land investment principles can be applied to any city.  But our company believes the necessary development momentum is only found I cities with a population of two million or more.

A small town’s population may grow up to 15 percent per year, but only a small amount of acreage is required to fulfill its development needs.  Conversely, the major growth markets of the United States develop thousands of acres on annual basis.  This provides less risk, shorter holding periods, higher returns, and greater liquidity for the cautious investor.

Only the most vital properties within a growth corridor should be purchased.  Such properties should have access to sewer and water and should contain no major physical problems.  Ultimately, these properties can be purchased for between 25 percent and 30 percent of the price a developer will pay when the tract is ready for development.

Also, on-site professional management leads to minimizing risks and maximizing profits.  Such management provides the company with an intimate knowledge of activity and marketplace trends.

The role of research

Research within a specific metropolitan area begins with a study of past rends: the why, where, and when of a city’s growth and evolution.  What has been the historical absorption of land?  Where did it take place?  Why did it occur where it did?  Was it because of the access provided by major thoroughfares?  Did the availability or lack of utilities play a role?  How did the development relate to employment and shopping centers and schools?  Were physical restrictions and barriers, such as rivers, mountains, swampy areas, railroads, or highways, involved?  Detailed knowledge of past trends indicates where future growth will occur and provides an understanding of historical land value trends.

Corridor concentration

Exhibit I shows our company growth study of Atlanta, Georgia.  The study and our analyses of employment centers, thoroughfares, shopping areas, utilities, and so forth made us realize the northeastern area is the focus of new growth.

These general aspects within the growth corridor should be analyzed:

1.  Center on factors that will impact the target area, such as the location and size of major employment centers, transportation routes, zoning patterns, local government’s attitude toward growth, location and quality of schools, and the price of housing in development areas.  

2.  Utility lines, including sanitary sewers, water, electricity, and gas, are evaluated to determine their location, availability, capacities, and possible effects on the area’s future property development.

3.  When appropriate, analyze mineral ownership, fault lines, power and pipeline easements, and soil conditions.  These elements are studied to evaluate their role in determining future land use.

4.  Traffic count maps are used to determine which roads are most important, both now and in the future.  Also, construction timetables for future roads   

5.  Review current zoning and master land-use plans.  To better understand attitudes about future development, discussions should be held with zoning board members and city council members.  

6.  Assess current absorption rates from other developers’ projects.  Monitor their current development activities.  How will such developments impact future projects in the area?

7.  Trends in development should be monitored, too.  How will changing consumer interests alter land use as well as current and future projects?

8.  Develop absorption studies by submarket and zoning categories.  The real absorption of land occurs when the project is occupied by the ultimate user, not when the property is sold to the developer.

After the corridor’s characteristics are thoroughly understood, you should identify those tracts that are most critical to the area’s orderly development.  Review each property as it relates to: zoning, frontage and access, soil and slope analysis, topography, and so forth.  

As the predevelopment land user is concerned with the three- to five- year horizon, he must always determine when the developer will be ready for the next project, and where it will be built.

Through this exhaustive process, you will identify the prime metropolitan growth areas, the primary growth corridors within those areas, and the most important properties within the corridors – those with the lowest risk and the highest appreciation potential.

Acquisition: The right move at the right time

Sophisticated land investors know the ultimate profit is made when the property is purchased.  That’s why our company believes land should be acquired three to five years before development.  Further, we believe the cost of the property should be 25 percent to 30 percent of the price developers are currently paying for comparable land that is ready for development.  These criteria assume that developers will pay no more for land in the future than they are paying today, and that continued demand will not exceed supply.  Also, they also assume the property has access to utilities, and that no profits are dependent upon changing zoning.

This conservative approach enables our company to minimize risks by adhering to a formula that creates investor returns.  Risk is primarily a function of the unknown.  So tremendous energies should be expended to identify and understand all possible risk factors.  By thoroughly studying a property before acquiring it, the investment outcome is more predictable, and the potential risk, if any, is more manageable.

Regarding property acquisitions, follow this simple rule: when in doubt, don’t.

The purchase process

If all the analysis factors are favorable, then consider price and terms.  But low price alone doesn’t make a property suitable for investment.  

You should negotiate not only the price and terms but also the factors critical to a proper acquisition.  You may analyze hundreds of properties and negotiate no many of them before you find a property that meets all of your requirements.  However, if any point of the contract has not been negotiated to your complete satisfaction, don’t consummate the acquisition.  Instead, move on to the next prospective property.  When you begin to compromise your standards, you create future problems for yourself.   

Tomlin Investments acquires a land parcel at a wholesale price.  After a three- to five- year holding period, the company sells the property to a developer at a retail price.

”Risk is primarily a function of the unknown.  So tremendous energies should be expended to identify all possible risk factors.” 

”When predevelopment land is correctly researched, carefully selected, and dynamically managed, it can be a stable and prudent investment.”

The effect of aggressive management and zoning on land values

Using the principles of aggressive management, the company can increase the property’s value before resale to a developer. 

Land management: A crucial factor

Even before you acquire a property, you need to design a management program with goals and objectives and a timetable for accomplishing them.  Successful land management requires hands-on participation, enabling you to take advantage of opportunities or to counter negative situations.  

By following an aggressive plan, you can speed up the development timetable and reduce the holding period.  Often, developers are willing to pay premium prices for land that has been readied for development .  So an aggressive and creative land-management program can lead to superior returns.

Management activities vary with each property, but they often include the following points:

1. Plan for zoning and rezoning-You shouldn’t buy property that must be rezoned to make your “numbers” work.  But if the value can be enhanced, or if resales are less difficult to achieve by rezoning , then you should begin the process.  Review your plans with city staffs and attempt to win their support.  Visit with the zoning commission, neighborhood groups, governmental bodies, and city council members, as well as with those making the final zoning decisions.

Share your market information with local government officials.  They are in the business of forecasting future growth from the city’s standpoint, and your data may help them to determine future utility, road, and school needs.

If your proposal is detrimental to the city, don’t even consider the project.  Being a good citizen and enhancing the city’s developments are the roles of a long-term player in any market.

2.  Donations may increase value - In some cases donating properties can be a valuable investment in community relations, and it may increase the value of your land, too.  For example, by donating land for future roads, our company persuaded a government agency to build roads sooner than planned because of the reduced road cost to the city.  Investigate the benefits of donating road rights-of-way or property for a future park, school, police department, or fire station.

3.  Remember site layout and property beautification - Study site layout designs for alternative ways to resell the land.  A good plan can help to determine the most profitable way to liquidate a property.  It’s a valuable in the resale process.

Property beautification can be critical, too.  When two tracts are equal in terms of price, location, zoning, and so forth, ,the developer will inevitable buy the more attractive property just because it looked nice.  Also, the attractive property will attract more attention and cause the developers to look at it first.

In other cases tree lines may block a view of the property.  Visibility is enhanced with care clearing.

4.  There are more points to consider - Obtain short-term income from the property by creating golf driving ranges, baseball diamonds, shooting ranges, and so forth.  Such measures will help to reduce the property’s holding and maintain its attractiveness.

Work to minimize or contest rising taxes and insurance costs.

Also, keep developers and brokers aware of the property.  When they are ready to begin a new project, they’ll remember your parcel.

Property disposition, profit realization

If you constantly monitor the economy, current market conditions and trends, and the progress of your management program, you will know when to hold the property and when to sell it.  When the timing         resale is right, use your research and prepare property resale information.  Such data should describe the property’s characteristics and include a development plan and a pro-forma analysis with appropriate exhibits.  These materials show potential buyers that profits can be made by developing the property.

The rewards

When predevelopment land is correctly researched, carefully selected, and dynamically managed, it can be a stable and prudent investment.  Its profit potential is greater than any risk.  But, as you can see, investing in predevelopment land requires the resources of an experienced, creative, and aggressive management team.  With strict adherence to your formulas and plans, you can achieve substantial returns - regardless of market cycles - year after year.