S.E.C. Real Estate Observer

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As I travel around I can’t help notice the abundance of unsaleable land parcels scattered around the landscape of America. As we all have experienced, not all land parcels are located on Main Street USA. There are many land parcels inclusive of farm land, forgotten commercially oriented development properties, remnant parcels, large hinterland acreage parcels, parcels with economically tired and nonfunctional buildings on them, and many others that haven’t sold for years. Many show up at local and national marketing sessions.

Of interest, a good portion of these land parcels are referred to as “Currency Land,” a term used to describe land with no discernible use or definitive value. Bob Findling, a longtime friend and mentor, CCIM instructor and National CCIM President, who unfortunately passed away several years ago, referred to this type of land as “Bullet Hole Land.”

Bob noted that in and around his native southwestern Michigan area, an abundance of land for sale was distinguished by old, rusted “For Sale” signs that were barely hanging on their supports. The signs had universally been used for target practice by local hunters—the derivation of the name Bullet Hole Land. Sometimes there were several brokerage signs hanging upside down or laying on the ground, a sure sign of “listing fatigue” and owners hanging on to the hope that the next listing agent was the “one.” This was land listed for years with no takers, just holding the rest of the earth together.

Many of us have owned or represented clients who own this type of property. No takers, no market, just sitting there doing nothing but growing weeds. So what ideas can we consider for this difficult issue? First and foremost, like any good broker practitioner, a realistic appraisal by a reputable appraiser is probably a good start. Obviously, this is chancy, as the appraiser is probably going to give the owner the bad news—his property is not worth what the owner thought it was worth. This is another letdown, but a more realistic perspective. If the owner balks at the value, then the Broker must decide whether he wants to inherit the succession legacy of failed brokers and get a sign back that is shot full of holes at the end of the listing period. But, as the saying goes, “Doing the same thing over and over and expecting different results is insanity.”

If the owner agrees with the value, the counseling of the client by the broker has to focus on the motivation of the client, his needs, and where he or she would like to go with the equity. An auction is one idea, as there will be a certain date for a sale, but the property will invariably be subjected to the “bottom-feeders” who buy much less below value. Many times there may virtually be no takers. However, there are other ideas to consider. If the owner is financially capable, adding cash to a transaction and exchanging both land and cash for equity in another property may be useful. This is a derivative of the “REO Formula.”

Another concept that has been used successfully by Colby Sandlian for many years is to use land as an Option Consideration to acquire another property. This changes the landscape for a seller of Bullet Hole Land, as it now casts him as a buyer in the market. This marks a reversal from his prior “sale only” mindset.

Let’s assume the broker finds a property offering some benefits his client seeks and assists him in using his property as an Option Consideration for the right to buy a new property at some future time. For example, the broker’s client may enter into an Option Agreement for the right to acquire a certain improved 12-unit apartment building valued at $1,000,000, using his $100,000 appraised Bullet Hole Land as the Option Consideration. Upon signing the Option Agreement, the broker’s client deeds his property to the 12-unit apartment seller. The broker’s client would then have a time certain to exercise the Option and, in most cases, receive credit at closing for the Option Consideration. If the broker’s client fails to close within the allotted time, the apartment owner keeps the land.

This may be an interesting tax situation as well. Although it is recommended to seek appropriate counsel in any transaction, some proponents indicate that there may be no gain or loss to either party until such time as the Option is either exercised or not exercised. Again, wise counsel is a paramount consideration.

Why would the 12-unit apartment owner take the Option Agreement offer and, more importantly, the Option Consideration? The apartment owner may be able to use the $100,000 option land to bury a portion of their equity for heirs (see below); trade for another property; or use the property for farming, create a land conservancy, or gift it to a charitable organization. Or, the benefit of taking the land may be the remaining portion of the $1,000,000 acquisition of the apartment building—in essence, $900,000 cash is the driving benefit.

Another twist is to not only offer the land as Option Consideration, but to couple that with a lease agreement. Let’s assume the aforementioned apartment complex has three vacancies. The broker’s client can agree to lease those units at market rents for a period of time commensurate with the Option period. Again, all or part of the rent can be allocated as a credit along with the Option Consideration upon the execution of the Option for acquiring the apartments. The benefit to the apartment owner is he now has a 100% occupied property. The benefit of the broker’s client is he has used his land as part of the acquisition of a new property and received credit for the land and rents paid.

Now let’s get crazy.

What if the Option Consideration is coupled with a pledge by the broker’s client to pay the Seller’s real estate taxes? The Seller avoids paying taxes during the Option Period and all or a portion of the taxes paid by the client may again be credited to the purchase. How many land owners out there would love to have someone pay their taxes?

Or, what if the Option Period was for 5, 10, 20, or 50 years? In essence, the client controls the destiny of the property for several years and perhaps locks in a fixed price. The Seller may balk and want increasing option purchase values over time, just as a lease does with periodic increases. In any event, the client still controls the property. Maybe the broker’s client couples this with a management agreement in an effort to improve the property during the option period.

What if the Seller accepting the Option is elderly and wants to give property to his heirs as previously noted? He could give the $100,000 land directly to his grandchildren. There may be some gift-giving tax advantages here as well, but again wise counsel is suggested.

Alternatively, what if the client enters into a long-term option, using his $100,000 as the Option Consideration, agrees to pay an increasing price for the optioned property and all real estate taxes over, say 20 years? The broker’s client may consider setting up a trust for future generations and assign the option to the Trust with some cash to compensate for taxes along the way. The Option Consideration in the form of the $100,000 land may conceivably have no tax consequences when assigned to the trust until the children agree to exercise or not exercise the option. If the property increases in value in excess of the buy price under the Option and there are added expenses to maintain the Option over many years, the heirs would gain substantially. Again, it is important to seek competent counsel to determine the viability of such a strategy.

Ownership is important, but significant and often overlooked benefits of “control” of real estate can be just as valuable. Using otherwise dead equities as consideration for an Option is a great consideration that has many add-on sister formulas that can enhance the overall transaction.