Commercial Land

11 Replies

Hey All,

I am looking into buying a few acres of commercial land.  It is a play in a small town that is about to get a couple hundred million development project that will bring jobs. 

Some activity has taken place but most of the land is still available.  I have an opportunity to buy at a time that is still early.  Values have only gone up on parcels that are in the immediate area of the project.  I have a shot at some of those but I believe that the entire town is going to have a great boom as a result.  There are other projects in this town that will get a direct benefit as a result.

The project is 99.5% ready to go and I will make my offer with an escape clause if the project collapses.

The obvious things to consider are price, utility access costs, and taxes.  I did purchase land in the past but all the development plans were completed already.

My plan is to buy in a location that would lend itself to a bank, chain restaurant, drug store, etc. 

Does anyone have any helpful advice on things to watch out for?  How about lot sizes?  I am currently looking for a minimum of three acres.

Drug stores want the corners. Land sits on 1 acre the smallest and 2 acres the largest generally with most at about 1.5 acres.

Bank and chain restaurants sometimes want the corner but usually off the corner as it's cheaper.

The thing with land is you have to time it just right. You will have dead carrying costs for years waiting to develop.

I am looking at some land plays too but only if I can develop within a year. I do not want to sit 5 to 10 years to do a project at this time.   

Thanks @Joel Owens

I do believe that this would be able to be developed within a year.  The fortunate part for me is that it would be with funds that I don't need to live off of.

In these types of land plays, will I need to do the development?  Obviously it would be nice to be able to do a land lease but how realistic is that?  I am guessing that most of the national chains like Jack in the Box or Walgreen's would do this on most of their deals. 

For a buyer those are 2 very different products. Pharmacy is flat rent in the primary term of the lease ( usually 20 to 25 ) years.

Food ( Jack in Box ) has the shortest shelf life of all NNN asset classes before it goes dark. It's all about who is guaranteeing the lease.

Example:

Jack in Box corporate all stores

Jack in Box corp subsidiary

JIB large established franchisee

JIB small new franchisee with just this one location or a few others

Lot's of other metrics go in it. Pharmacy can do a ground lease.

Typically NNN absolute is most desirable followed by ground lease and then NN.

@Joel Owens

I was under the impression that ground lease was more desirable. Isn't it the same as NNN but without the need to develop or do any TI's?

It depends on what view point you are looking at this from.

A ground lease helps the developer as it is less money they have to come up with upfront for the land.

For an end buyer and getting the best financing NNN is the most sought after. Also at play is whether the land owner will subordinate their position where the lender could claim default on the land and the building instead of just the building. If the land owner will not do this it makes it harder to finance.

Originally posted by @Joel Owens :

Food ( Jack in Box ) has the shortest shelf life of all NNN asset classes before it goes dark. It's all about who is guaranteeing the lease.

 So food in general such as a Denny's, Red Robin, Burger King, etc. would likely have a shorter shelf life than a bank or pharmacy, correct?  Thus, they would likely have a higher cap rate on the sale. 

Thanks again for your inputs.  They are very valuable to me!

Originally posted by @Joel Owens :

It depends on what view point you are looking at this from.

A ground lease helps the developer as it is less money they have to come up with upfront for the land.

For an end buyer and getting the best financing NNN is the most sought after. Also at play is whether the land owner will subordinate their position where the lender could claim default on the land and the building instead of just the building. If the land owner will not do this it makes it harder to finance.

 In this case, I would like to either develop, sell to an end user, or find a tenant and sell.  Thanks.

Pharmacies such as CVS and Walgreens have been around a long time. They are over 100 years old in some cases as a business. In NNN they are the rock of stability and longevity. They are investment grade at BBB- or better so you can get the best loan terms on them.

Very little food is BBB- or better. Most food concepts do not last more than 20 to 25 years. There is a lot of boom and bust with food. That is why cap needs to be higher with built in annual increases on the primary term of the lease to compensate for the risk. For single NNN I think it is a good time to develop but I would not be thrilled about holding. If I can develop at a 9 cap and hold that is one thing but not buying a finished product at a 6 cap with 25% down. I would rather own a strip center in that situation at a higher cap with diversified risk with multiple tenants.

I believe NNN single tenant is too frothy for my liking right now as a buyer. There are tons of buyers out there though that look at a 6 cap as a great thing when Cali is throwing off 2 to 3 caps etc.

So I would have to develop with a number I know I could sell off for quickly.   

Originally posted by @Joel Owens :

 I would rather own a strip center in that situation at a higher cap with diversified risk with multiple tenants.

   

 These are getting hard to find in the Phoenix market.  Everything that I look at these days has something wrong with it that is not fixable.  Or, it is simply overpriced.

This has changed over the past six months to a year.

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