Offering a $1 Million Bird Dog Fee: $7+ million Commercial Development Site Near Seattle
If this isn’t the record Bigger Pockets offer of a bird dog fee for a wholesale-priced property deal, I’d love to hear about it. But, it’s legitimate.
In short, in my home Snohomish county just north of Seattle, and in one 3.5 square mile Urban Growth Area, starting probably August 12, it will be possible to massively and quickly upgrade the number of condos that can be built on a properly zoned site, to nearly three times the current permitting.
But, to get this upgrading, you’ll have to “buy” it with something called a Certified “Transfer of Development Rights” credit.
These TDR “upgrade credits” are purchased from the local owners of (mostly) farmland who have unused residential building rights credits. Through the new county TDR “resource land conservation incentive” program, these credits are split off and then transferred to this initial UGA, where they are submitted along with the building permit applications for an instant and guaranteed density bonus upgrade to 260%.
Acquiring these credits will not be simple: There is no central bank or clearing house for them. Each acquisition must be a private transaction with resource land owners, and the majority of them won’t qualify to have anything to sell. And, many of the qualified sellers won’t know that they even have something new to sell. Beyond that, their land also needs to be debt-free before they can get certified. Not simple, not easy.
These TDR upgrade credits are my real estate investment stock-in-trade. I’ve been developing my knowledge of them and how to play them as investments for more than 5 years, so I know how to get a lot of them at rock bottom costs, sometimes less than zero. I currently have 304 of credits in inventory and a strong bead on up to 1,000 more at essentially a zero net cost.
By any viewpoint, this is a tiny esoteric real estate investment deal that only applies exactly like this program within one county in the entire US. But, by my estimates, there is somewhere between $25 million and $50 million in low-hanging fruit to be harvested, several small fortunes to share, and that’s certainly worth the chase.
But owning these credits doesn’t do me any good unless I get them sold. For that to happen, someone needs to invest in some prime commercial land and then acquire the TDR upgrade credits that it takes to achieve the high density permitting. In this case, the upgrade is from 159 condos to 419 within the same footprint.
Essentially, what I’m trying to do here is to proactively create a customer for my credits, rather than passively waiting for one to show up.
I’ve also structured my part of this deal so that not only will the permitting be bumped up hugely, the net cost of the land for each condo will actually drop by 33%, which is going to save the developer almost enough money to offset the original cost of the land. 33% a pretty sizable discount, on the order of a $6.3 million developer savings.
But, I don’t personally know any wealthy investors in this league, either developers or buy-and-hold commercial land investors for this smoking Seattle-adjacent market. So, I’m opening this up to the BP community with a $1 million bounty for the deal-maker who can put this deal package together.
And, yes, even in 2015 $1 million is a big chunk of money. But, I’ll still be pocketing another $4 million, so I’m not complaining. What this first sale does for me is open the door to even bigger profits by repeating the same formula many more times.
Anyone can play here, subject to your local laws, and there is absolutely no cost to enter the free market competition. Basically, this scenario is such that the player is putting together a deal for a buyer/investor and earning a bird dog fee from me for success.
The “winner” of this bounty/fee will the first person to somehow arrange successful purchase agreements for both this subject land and my TDR upgrade credits, with a closing within one month. If this timing is not met, or for any other reason, I reserve the right to accept a backup offer that meets these requirements.
The reward for success will be paid out in one lump sum at the end of the land and credit package purchase process, which will be concluded via a bonded escrow process (either together or individually). Ideally, the escrow agent will be Chicago Title Insurance, which has offices all over the US. CTI will be writing a couple of checks during closing and one of them will be for $1 million, payable to the first person to put this package together at these prices.
There are also "runner-up prizes," too. This subject property is not the only qualified TDR Receiving area property in this 3.5 square mile UGA, with seven miles of commercial land frontage, much of it undeveloped to full value. There are numerous smaller commercial parcels here that are listed in the MLS, as well as many that aren't even for sale yet, that also qualify for this county TDR density upgrade program. At my 50%-off TDR credit selling price of $22,000, I'll happily pay the same $3,846 bird dog fee per credit for these, too. More info on this will be found at the end of this post.
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To Begin:
There is listed for sale a prime 7.23 acre mixed-use/multi-family zoned development site, just south of Everett, WA. The asking price is $7.7 million, which is right in the ballpark for this location/market, but just a few pennies on the dollar compared to nearby Seattle’s prices.
There are some major positive zoning changes coming to this neighborhood in the very near term, probably in early August 2015. The exact timing of the final passage isn’t certain, but this zoning upgrade is the conclusion of 30 years of local planning that’s extending out for the next 25 years and the changes are certain.
The Heart of a New TOC Neighborhood.
This is not junk development land by any means: Located on major bus routes (every 12 minutes) close to the regional transportation hub, close to all services and very close to the main Boeing plant, as well as central to a rapidly-growing aerospace supply industry with high-paying jobs, this site is in the heart of what is going to become a huge new “Transit-oriented and walkable community.” This new high-density TOC will be starting first along this unincorporated 3.5 mile stretch of Highway 99, then eventually expanding both north and south into Everett and Lynnwood.
This site, abutting the southern Everett city limits, is where most of our rapid population growth is being steered by planners - away from rural and into existing cities - for the next 25 years. In addition to our own explosive growth from local industrial growth, this is also the spillover area less than 30 minutes away from the exploding Seattle/Bellevue markets. Greater Seattle has been labeled by large national developers as “the new San Francisco.” Market prices just south of Snohomish county are double or more, with no sign of slowing down. Home sales inventories in Seattle are now less than one month in size and most listing sell for higher than the asking price.
As a result, many thousands of longtime Seattle residents are being frozen out by the steep rental price increases. So, folks are moving south toward Tacoma and north into Snohomish county. If this rocket-to-the-moon real estate market trajectory was happening in Hoquiam, certain folks there would be even happier campers.
You can see the property listing, with plenty of photos, here: https://www.redfin.com/WA/Everett/12800-Highway-99-98204/home/2658639
(If you’re into market price comparisons for selling points, however imperfect, a small 1.2 acre condo development site in downtown Bellevue just sold for $24.9 million. At that rate, this 7.23 acre Snohomish county site would be selling for just over $150 million, instead of $7.7mm. Of course, these are very different neighborhoods. But, a price ratio of more than 19:1 for condo sites less than 30 minutes apart, and with only about a 15 minute difference in commute times to Seattle, seems high. http://www.bizjournals.com/seattle/morning_call/2015/07/condo-developer-nat-bosas-next-target-downtown.html If you want to get even crazier, development land in downtown Seattle, 30 minutes south, sells for $600 to $1,000 per square foot, while this subject property is under $25 per foot.)
This site is currently zoned (at a baseline of 22 units/acre) for building 159 condos in 45’ tall buildings, plus some ground floor commercial.
All else being equal, the main determinant of the market value for multi-family land is the cost per condo building “pad.” i.e. it takes 2,000’ of land to qualify for one dwelling unit permit.
At the asking price, this per-unit cost is about $45,000, which is also in the ballpark for the local market. New condos around here sell for around $250 to $350k, depending on the degree of luxury, which won’t even buy you a studio condo in Seattle.
But, with the completion of this package, however, this per-unit cost will be dropping by 33%, down to about $30,000 each, while the finished condos will still sell for the same price. That’s a huge selling point. Here’s how this will happen.
Changes Coming:
However, this base density zoning (of 2,00’ of land per unit) is about to change with a major upgrade, with a reduction in the requirement per unit down to 750’/unit.
In the very near future - I’m expecting August 12 - this UGA neighborhood will be granted a density upgrade to 260% of the current baseline. That new zoning means 58 units to the acre (instead of 22) with 75’ buildings in the same footprint.
The more units that you can build on a site, the more profitable will be the project, of course. The new permitting for this site will be for 419 units, which beats the heck out of 159.
For the specific details on this upzoning, please see the official documents on Snohomish County Council resolution 15-016. As this is being written, you’ll find it near the bottom of the county’s web page at http://snohomishcountywa.gov/2134/Council-Hearings-Calendar (None of the proposed minor amendments mentioned here will impact this deal.)
I really do expect this zoning change to finally pass August 12 - it’s been a long time coming, the lobbyists battles are over and this is the final piece of the TDR program, which has been in planning for 30 years and officially came online about 18 months ago.
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But, I have no direct interest in this property!
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However, its sale is the key to my offering a $1 million cash finder’s fee to whoever can put together its acquisition. My goal is to create the buyer demand for what I have for sale, that will result in a deeply-discounted total project price.
I know that this probably doesn’t make complete sense, but all will become clear in a moment. :-)
“And Now, for Something Completely Different...”
While the zoning upgrade is a near-term certainty, there’s a special new requirement that applies only in Snohomish county, that almost nobody has ever heard of, and that is unavoidable in order to receive the 36 bonus density upgrades:
THE DENSITY UPGRADES DON’T COME FOR FREE!.
(In the 15-016 resolution document, look for the word “mandate.”)
Here’s how this new set of rules works. It’s probably different from anything in your experience, but it’s not that complicated, just new:
A. The first 22 units per acre of permitted development are included with the ownership of the land, like usual. That’s one of the rights that comes with ownership and they are granted automatically when building permits applications are submitted at this level. When you divide 22 permitted units by the typical $1 million/acre local market value, that works out to a local market cost per permit of about $45,000 each. All else being equal, this is the figure by which the value of the property is calculated.
B. But, in order to be granted the permits to build the additional 36 units/acre that the rezone is creating, you’ve got to have a special “magic sticker” that’s submitted along with the building permit applications. No magic stickers, no high-density upgrades, and no “normal” zoning variances, either - it’s that simple.
C. Whoever ends up owning this land, and wants to build it out (or resell it) for full profits, will have no choice but to somehow obtain these key “stickers.” But, if you possess them, the upgraded permitting density will be both instant and guaranteed. This is all verifiable with county PDS.
This is where I come in, as a major supplier of these Snohomish county stickers, aka "TDR credits." "Clipping and flipping" these credits is my REI specialty niche. I've been building to this point for more than 5 years, when I bought my first 14 acre farm, with many more resource land purchases planned and just awaiting capitalization.
However, especially in these large quantities, finding TDR credits at any price is going to pose a huge challenge for most developers or investors. There is no central source or broker or “bank” for them. They’ll need to be procured directly from the landowner sources, like me, and most of them won’t be able to supply more than a dozen or two credits, if that many.
Supplying these things to end-users is my particular REI stock-in-trade and I know what's out there for sources: About 2/3 of all the farmland in the county won't qualify to sell any credits at all and the few that do qualify will also have to be mortgage-free.
I saw this scenario coming more than five years ago and I’ve got stickers in hand right now, including all 260 that it will take to upgrade this subject property to 419 units. And, I’m drowning in further acquisition deals that will add many hundreds more of them to my inventory, at a happy profit.
So, my main interest is in reselling them, preferably in big handfuls, at a fair price for all.
“TDR”
If you’re going to sell a deal of any kind, you need to have a strong understanding of every major aspect of it, especially from the customer’s perspective. It’s pretty much guaranteed that you’ll have to explain the role of TDR magic stickers, so I’ll go into some depth here.
Officially, these magic stickers are actually called Certified “Transferable Development Rights credits.” (TDR). They are Certified, with individual recorded certificate numbers, by the county’s Planning and Development Services. PDS is also the agency that accepts them when they’re eventually submitted along with urban building permits.
Again, if the developer wants to max out their project profits on the particular parcel of land by building the maximum number of units, the only way that they can get building permits for the extra 36 units/acre (after the first 22) is to attach certified TDR credits with the building permit applications.
But, in short, TDR is a new ( completed in October 2013) resource land conservation incentive program that uses the free market to discourage population growth in the outlying resource land regions, where growth isn’t wanted and channels it into existing urban areas with much higher density, where it is wanted.
You’ll find the exact details of the TDR program here: http://snohomishcountywa.gov/DocumentCenter/Home/View/8118 If you’re going to explain this, and hopefully make a few happy bucks off this change while there is still low-hanging fruit and before I give up this niche to search for greener pastures, you really need to understand these details and be able to sound authoritative. Actually, TDR is not that complicated. The challenge is that it’s a brand new concept to most people.
It’s actually a real benefit to the developer to be able to pick up the extra 160% bonus project density as a certainty, with a known cost and immediately. The option of using the county’s formal subdivision process in this area would A. Probably take at least a year and B. Not be approved. The county is well-aware that resource land owners cannot conserve their land for future generations by selling off surplus development rights unless there is a free market demand for them. This demand is created by mandating their use in this first new urban growth area, and this requirement is deeply ingrained within county policy. There’s just no option.
The only thing that you really need to worry about, though, is to ensure that the TDR credits are Certified, and they will be. This can be verified through the county records. But, you’ll still need to be able to explain things.
“So, what’s all this about the $1 million finder’s fee that you keep hinting at?”
Basically, this $1 million fee, commission or profit etc. is what I am willing to pay to anyone who can put together a deal that combines this land and my TDR credits. It’s a package deal and it results in a per-unit development cost discount of 33%. The first person to arrange a lock in of the property and my credits will be first in line for the closing escrow payout.
I expect to gross $5.72 million on this single sale. So, I’ll be happy to share the wealth with whoever made the deal happen. The way I see it, I’ll still be netting $4.72 million and the extra million is just a cost of doing business. At this kind of economic level, who can really tell the difference?
And, I’m also being extra generous because, once I’ve done this first TDR credit sale, I can self-fund my further acquisitions, both Sending and Receiving lands, from then on out. So, this first land/credit package deal is just a warm-up lap for me. The big race starts after that.
The Basics:
Here’s the basic deal that needs to be put together in order to earn this fee:
The essential strategy is to find a commercial developer, and/or land investor who likes fast-appreciating markets. Then, explain this investment opportunity and sell them on the idea and get them to contact the listing agent to lock in the deal, with a short closing.
(Or, be a commercial developer, or land investor, yourself and get a $1 million rebate.)
So:
1. You need to find someone to either buy or otherwise lock in control of the subject development site. This is a direct negotiation and I have nothing to do with it. With a 33% average cost discount in comparison to the cost of all the other local sites, it’s going to be one heck of a great value, if you can afford to play in this financial league.
How that land lockdown is accomplished is up to the new buyer - I have no direct interest in that part of this transaction. So, if they “cut” the seller’s throat with a lowball offer, I don’t care. Since this land has been on the market for nearly a year, if I was a cash buyer, I’d start with a $5.5 MM offer and see what happens. But, even paying the full asking price will still deliver exceptional returns, too.
This shouldn’t be a tough sell, if you know some heavy financial hitters: The buyer is going to end up with a total net savings of about $6.3 million below the going rate for condo building “pads” without the TDR upgrades. On land with an asking price of just over $7 million, that’s a pretty significant savings in the long run.
Instead of the current market price of a $45,000 each, for 159 units, the new average cost will be about $30,000 each for 459 units.
That immediate savings, which goes straight into the developer’s profit column, is nearly big enough to pay for half the physical land, so I’d call that a “wholesale” price.
The total cost to purchase this site, with a guaranteed qualification of 419 condo permits (plus so ground floor mixed commercial) will be just over $12.5 million. So, whoever you offer this to will need to be able to either write a check for this much or be able to borrow it. It may sound like a big bite, but there are dozens of national developers for whom this is petty cash. They’re out there!
Alternatively, it’s not necessary to buy this land in order to buy my credits. They never expire and they can be used anywhere within this urban growth area.
Since they essentially replace the need for 160% more physical land, they should actually go up in value as the land that the impact rises in value for years to come, thanks to the explosive spillover from Seattle. Ultimately, there will be more land that requires TDR credits than easy-to-acquire credits, so I’m expecting a shortage to develop, possibly within a few years - I’m certainly intending to try to corner this market.
So, even as standalone investments, TDR credits should be rising at 12%/year until Seattle slows down, which won’t be for a while, yet. The major tech companies that keep opening branch offices in Seattle to attract top talent haven’t even started slowing down, yet. These are companies like Apple and Facebook, as well as many heavy hitters that you may not have heard of. Essentially, Seattle is becoming a suburb of San Francisco, now that expansion into Portland has been maxed out.
But, however my credits are sold, I pay the same commission rate.
If you can also squeeze a bird dog fee out of the land’s buyer, from the $6.3 million that they’re saving, that’s fine with me. But, I’m also in a hurry, so don’t let greed delay things. This isn’t necessarily a one-shot deal for you, either, even if none of the others will likely be as big as this one.
Actually, there are plenty of qualifying commercial sites along this stretch of Highway 99 that are even bigger, but they aren’t actively for sale. So, like a successful wholesaler, don’t be afraid to knock on doors even if there’s no sign on the property.
2. The second part of this package is that you need to make sure that the new landowner also buys their TDR credits from me, at $22,000 each X 260 = $5.72 MM. This is a discount of just over 50% of the going rate for the cost of land-based building permits, which averages out to a 33% discount for the entire 419 units.
Whether the development right that’s needed for a building permit is land-based or transferred in, they are all functionally equivalent to each other, except that each fills a certain section of the total permitting. Again, the first 22/acre come with the land and the additional 36/acre comes only with TDR credits. In other words, you don’t need TDR credits for the first 22/acre and you can’t get the next 36 without TDR.
This 50% discount on the 36 bonus permit level is how the total cost for the overall development is cut to 67% of the base cost and that part of the two-part package is where your dealbulder/finder’s fee comes from. Technically, this discount also comes out of my pocket, but I’m happy to leave it on the table for buyer incentives.
I hope that’s clear. Please let me know if it isn’t.
Options
If you’re the direct buyer/developer, or longer term investor, for the land and credits, I’ll rebate the $1 million to you at closing, either as a discount or payable as you designate.
Something else to keep in mind if you’re a licensed real estate agent or broker is that this is a listed property, with an asking price of $7.7 million. So, there’s also a hefty selling agent commission to be earned, too. That has nothing to do with me and if you can double, or triple, down, good for you.
Also, if you're not the final developer, once the land is pulled off the MLS and packaged with my TDR credits, I can steer you to a couple of large developers who should be interested in this simple and complete high density package.
So, that’s it in a nutshell: Be the first to figure out a way to put this 419 condo package together and you’ll earn yourself a cool 1 million dollars from me, payable out of the buyer’s funds at the escrowed closing.
Lather, Rinse, Repeat
As I mentioned above, this is not actually a one-shot deal. I can deliver plenty more of these TDR credits and there are many more commercial development sites in this same new density bonus upgrade area where they can be used for 160% upgrades. But, these other sites are not as big as the above site, which is the largest that is currently listed. However, they all qualify for this same deal and I pay the same finder’s fee of about $3,846 per Receiving Area credit sold (@ 36 per acre). I’ve seen a few other qualifying properties recently on Redfin.
Where to look for more TDR Receiving land:
There is no final map yet to delineate the exact boundaries of the “Highway 99 Corridor of the SW Urban Growth Area” upzoning that 15-016 enables. Actually, what’s going to happen is that the properties that qualify as mandated TDR credit Receiving Areas will have a “-ra” added to their zoning in the county’s master zoning map.
That designation change probably won’t be completed for a couple of months after the final passage of 15-016. But, in general, the qualifying properties will:
1. Have one of the commercial zonings (as designated in the long form of 15-016, linked above).
2. Range from the Everett city limits on the north end of this new zone to the Lynnwood city limits on the south - basically everything that is within unincorporated Snohomish county. This stretch of 99 stretches for about 3.5 miles in length, on both sides, and there’s a ton of land here that is ripe for TDR-enabled redevelopment.
3. Appropriate sites with the appropriate commercial zoning will extend about 1/2 mile on either side of Highway 99 between the North/South boundaries. There should also be other major transit routes (that end up at the Everett Transit Center) within the county jurisdiction to the west of I-5 that will qualify. So, I’d be looking for commercial land at least along SE 128th and SE164th, too. Anything commercial-zoned on a bus line within these 1/2 mile wide boundaries will probably qualify and it will be easy enough to verify it with PDS. I know that they’re out there.
If you have questions of general interest, please post them publicly below so that I can answer them just once. I do expect you to have read and digested all of this before you start asking questions, though. :-)
If you have economic and/or confidential stuff to discuss, please PM me. I’ll be happy to help you succeed in any way that I can, but time is of the essence.
And, one final thing: While I promise not to poach a live potential customer that you may have going, I’m also going to be contacting at least a couple of national developers who are already active in the Seattle area. So, this offer may be pulled off at any time and for any reason. Time is of the essence for both me and you.
But, there will still be more until I’ve harvested all of the profitable TDR credits that county resource lands have to offer - another 1,000 or so. My target “clip and flip” investments are probably only about 10% of the total resource land supply, but the rest aren’t going to be particularly profitable to invest in. So, we’ve got at least a couple of years of these deals waiting to happen, but no guarantees beyond that.
Becoming expert on this real estate subject can definitely pay off more than once. For that matter, this cutting edge TDR program is envisioned to expand into a regional program, and other new TDR programs across the US will be firing up. But, that’s for the next generation, while I’m out sailing.
Thanks!
Now, go fly and build us all a fat juicy deal!!!
Chris