The Autopsy

One of the great things about our business is that we not only continue to learn new concepts and creative ideas, but we are continually reminded of the “tried and true.” Cort Parker, a vibrant and gifted Society Member, introduced a valuable visual concept many years ago. Cort developed a matrix or chart, which separated the various components of real estate into small pieces. Perhaps you have seen it. It looked akin to an auto engine in a Popular Mechanics magazine where all the parts are exploded to the edge of the page revealing the inner workings and how everything is put together. By using this chart, Cort introduced many of us to a visualization of real estate beyond surface expectations. The land, improvements, air, water, mineral, subsurface, leasehold and other rights were graphically displayed.

Cort’s concept has become very valuable to me over the years, as it has provided a template for reviewing and analyzing new properties. That template has ingrained in me the first and most basic of questions regarding a property. “Is the dirt good!” and “Can I change the use?” Although these are only two of Cort’s principles, I try visualizing a site as if there were no buildings, paving, water towers, landscaping, utility poles, lines, or other surface obstacles. In essence I mentally look at the land as if it is completely cleared. This raw assessment provides the basis for determining a “quick and dirty” value of the land. I want to know that if by demolishing the site improvements and incurring the commensurate costs to do so, the land value will be less than comparable other vacant land parcels in the market.

My experience has shown that this approach is most effective when looking at properties that are older, maybe inner city, which are functionally or economically obsolete or just plain tired. For instance, most old industrial sites generally have a disproportionately greater land mass in comparison to buildings. Some of these opportunities are prevalent where you may find boarded up buildings with graffiti or those affected by environmental constraints. You may just as easily find a leased building that is in the path of progress. This concept of zeroing in on the Land is also extremely effective when used in path of progress or resurging areas. The best analogy I can give is the razing of homes in great neighborhoods to build a newer bigger home. The same effect can and is being applied to commercial and industrial real estate across the country. Old buildings in high growth areas are being demolished and new or alternative enterprises and improvements are replacing them. The Las Vegas strip has undergone much of this effect. Old casinos make way for new ones.

Again, it is important to recognize that a land parcel encumbered by erstwhile improvements may cost less per square foot than comparable land properties. For instance, a 200,000 sq. ft. building listed for $7.00/sq. ft. (old warehouse) by broker Harry Hustler, equates to a $1,400,000 value. The building sits on 25 acres of land in the path of oncoming yuppies. The cost for demolition and environmental is $400,000. Total cost for acquisition and demolition = $1,800,000. Your break even, as it relates to land only, is therefore is $1.65/sq. ft. If market comps are approaching the $2.5 ($2,722,500) to $3.00 ($3,267,000)/sq. ft. area you may have a pretty good chance for a decent profit.

If so, this lays the groundwork for several scenarios. You can: 1.) Demolish and rebuild thereby packing your upside land profit into the new venture; 2.) Take your profit in the land (by virtue of the market value less your acquisition costs) and sell or exchange; 3.) Hold and do nothing and rent the improvement in the interim as a land holding device; or Take a portion of the profit in a fee type deal and broker the property to another investor.

Several years ago I used this concept by demolishing a functionally obsolete 170,000 square foot shopping center at an expressway interchange. At first I thought the shopping center was a typical rehab, but later found out that the center was too far-gone. A quick analysis of increasing land values in the area and a determination of environmental and demolition costs revealed a substantial profit in parceling the land after demo and infrastructure. Knowing our overall land costs made our profit more certain. Our costs were low….we were substantially under market going in and therefore poised for profitability.

I am sure many of you have used this concept and have experienced some great results. There are variations and add-ons that can dove tail. The important thing to remember is to look beyond the surface of each property to find its true value…. that can often times be the Land.

Many thanks to Cort.

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