Blog here.

This is an article posted on LinkedIn by Michelle Cohen./  While I agree with her that a bubble is looming, Land remains one of the best investment vehicles.

Midwest farmers are certainly growing corn, wheat and soybeans, but now there are questions about whether they’re nurturing a real estate bubble as well.

A new report by the Federal Reserve Bank of Kansas City found that crop land prices in the Midwest have risen by more than 25 percent during the last 12 months. It was the highest rate of increase ever monitored by the Kansas City Fed.

“There are people out there looking for alternative investments to the stock market right now,” said Kelvin Heck, a broker with Lawrence’s Colliers International. “Land is still something they aren’t making any more of, and I think some people are buying it just like gold as a hedge against bad times.”

The Federal Reserve report estimated that in Kansas, non-irrigated crop land increased by 20 percent for the year, irrigated crop land by about 15 percent and pasture land by about 12 percent.

In the Douglas County area, the market is more mixed. Heck said the market for fertile bottom ground in the Kansas River has been active, and prices likely have been increasing near the rates suggested by the Federal Reserve.

But the price for less fertile property outside of the river valleys has seen less of an increase, said Dale Bohn, an appraiser with Frontier Farm Credit. Bohn said those types of properties have been hurt by the slowdown in new housing growth. That’s because many of those type of properties in Douglas County aren’t just bought as farm land but also are used for rural housing.

But Bohn agreed with the Fed’s assessment that land being bought for truly agricultural purposes is increasing rapidly in value.

“We’ve been seeing some record income levels for farming the last few years,” Bohn said.

Strong commodity prices, especially for corn during the ethanol boom, have helped drive up land prices. The Fed noted that Nebraska has seen crop land values increase by about 40 percent for the year.

Heck said he had heard reports of even more rapidly increasing prices in Iowa, saying that some bottomland in Iowa has sold for $16,000 an acre. For comparison, Douglas County bottomland is more likely to sell for about $4,500 an acre, he said.

The rapid increase has some in the agricultural industry watching the situation closely and hoping that a 1980s-style agriculture bubble doesn’t emerge. Lenders said the agriculture industry is far less leveraged than it was in the 1980s, which is leading many to hope that any bursting of a bubble won’t be as devastating as it was 30 years ago.

“But the pendulum always swings too far in these sorts of things,” Bohn said. “I don’t know how far agriculture land values have to rise before it happens — it may be 5 percent higher or 50 percent higher — but it will get to the point that the pendulum swings the other way.”

Tom Dillon, president of Baldwin State Bank, said he thinks area farmers aren’t likely to drive up land prices too much in the coming year. He said area farmers did not have a particularly good year in 2011 because of the dry conditions.

“If they would have just grown an average crop they would have been sitting pretty right now,” Dillon said. “But they didn’t get the rain when they needed it, and based on what has gone on this fall, I don’t think you’ll find many farmers real optimistic about next season either.”

There has been no direction give or projected by the 99 Per-centers.  They are expressing a general dislike for the society in which they live. Many of the "Celebratory Supporters" are part of the one percent that is the subject of the protesters.  Most of these protesters would gladly take a job on Wall Street and trash their beliefs in the process.

Getting a client is one thing.  Determining their requirement is another.  Finding a solution to full fill the requirement is another phase.  Closing the deal and follow up after the close are the big pay off or are they? 

Real Estate is mostly relationship driven.  Your client comes to you out of trust and respect. It sometimes takes years to build that relationship and it may be years before you get a payoff from your hard work.  There are many ways to find out what requirement you client may need.  But, it has to be about your client and his needs not what the biggest pay-day you will get.  In many cases I have uncovered needs that require a skill set that I don’t have.  I make sure that the requirement is handled by a competent friend and I follow up to make sure it is done and done to the clients specifications. 

I’m a land guy.  Let’s say my client wants a piece of land to develop as a business park in suburban Channahon, far southwest of Chicago.  That’s my forte. I sit with him and discuss the various sites available in my database. I have developed the most comprehensive database in the Chicago area.  It is integrated with my AirPhoto program and allows us to “fly” the aerial and find the best land site for this requirement.  We start at four-way interchanges on the major toll ways in the area.  In Channahon it happens to be along I-55 and along I-80 which cross in the area.  I have marked where the competition is from other developers and know the ownership of the vacant sites in the area. We pick one primary site and a couple of secondary sites to review.

 I contact the land owners and find out what their interest in selling is and what their price expectations are.  In most cases, I know the land owners from previous relationship building efforts and can quickly get to their hot buttons.  My developer client and I pick the primary alternative and I write up a Letter of Intent (LOI).  Depending on the market, the asking price is usually far from the first offering price.  Most land owners are very proud of their property and have been romanced in the past by other buyers when times were hot and a farm property was put under contract for $75 to $80,000 an acre.  Many farmers have put properties under contract with developer and have gotten them back when the market crashed.  Some farmers have sold their land at a great price and have purchased it back from the bank that took it back from the developer.  What a way to make a profit and they have their land back.  This round robin has also created inflated values in the eyes of the sellers.  If they are not getting top dollar, they will just keep farming until it comes around again.

Next time I will get through the contract, entitlement phase and the actual purchase.

So, I had my physical last week.  All looked good but just taking the EGK reminded me of the ups and downs of the current real estate market.  As a side note, they doctor had a new, wireless EKG.  They plugged the leads from patches on my body into the wireless EGK box.  Then the nurse than sat at her computer and recorded the results.  Then the doctor could overlay these results over my last EKG and look for anomalies.  None found.

But just picturing the bouncing lines reminded me that everything has the gyrations.  A real estate market has lots of ups and downs as does the stock market.  My deals are more and more like this also.  It’s blowing up today it’s flying high tomorrow.  Just look out for the flat-line.  You nurse deals along from year to year and boom it goes into a comma.  It takes twice the effort to revive it and more babysitting to get it going again.

So, here I am trying to revive four deals.  Are they dead?  I don’t think so but I am hustling around with all of them on Life support.  So, This post will be short because I have to work a little harder today.

Not much to do with real estate but very interesting for this layman.  I started with Village Presbyterian Church 20 years ago and early on decided to do something to help.  I became a camera man wheeling around a 300 lb camera on a tripod.  Fun because I got to know everything that was going on behind the scenes.  This was pretty antique technology when compared to where we are today. We have a new studio, same old room but with a lot more room now that the old monitors and recorders have been replaced.  At the heart of the studio is our new TriCaster Studio which we use to record, edit and duplicate our services.  It also allows us to live stream our service to the internet so, if you’re out of town and want to see what’s going on, just turn on your computer and go to the web site. I think we have a three second delay to the live time.

We also have three remote controlled cameras located throughout the church and all are controlled by one small box with joy sticks in the control room.  A couple of weeks ago my camera man failed to show up and I was able to run both the TriCaster and the cameras.  The system is very versatile and relatively easy to use except for the actual editing.  Now, editing is vastly easier than in the past.  Now I can take out and replace whole chunks of the service to make the show exactly one hour. It also will allow me adjust just about everything in the production for increasing volumes to changing colors and fonts.  It also has some really cool fades. 

To try and relate this back to real estate, our industrial trade association, the Association of Industrial Real Estate brokers, (AIRE) started last year to do a virtual bus tour of selected markets in the Chicago area. In the past we did actual bus tours where we would have four or five busses and we would troop off in line to see buildings and development sites.  A fun time but you only go to see about 25 properties in a specific market.  Last year was our inaugural Virtual Bus Tour.  I used Google earth Pro to create movies of the selected buildings and sites.  I was able to fly around each building and give overall vistas of the markets.  We covered tow areas of Chicago; the I-94 corridor from O’Hare to Racine, Wisconsin, and from O’Hare out west along I-88 west past the Fox River.  I think it was about 150 properties that were covered in an hour.  This is with all recorded comments with professional vices and one story told to all.  It was hit or miss on the real bus tour because there are market experts and then there are market experts.  If you like, you can watch the tour from last year on our website:  http://www.aire-brokers.org/.  On the right side of the opening page there is a link to the Market Tour Presentation.  This year, we are doing four markets around O’Hare.  Well that’s enough for today.  Tune in next week to find out what evil lurks in the heart of man.

Last week I was flying around and explaining how my flying related to my business of land brokerage.  This week I am trying to cement several deals and to make sure that I have not become a volunteer. That is a legal term that states you are working for free.  Not a good thing to do.  So, I have begun to paper my deals with invoices and a paper trail showing me as the procuring cause in these deals.  In one case, there is a client of mine whom I have been working with for almost two years.  I do have a written agreement with him but he has a new partner who sent an e-mail to me saying he didn’t know that any monies were owed and what was I expecting?  So, I promptly sent him the copy of the invoice and the timetable I was expecting.  No response yet and I don’t want to go to court to collect my commission.. 

The legal avenue can work out but it is costly and takes a long time.  Several years ago s represented a client in the purchase of a 7 story office building in Schaumburg, Illinois.  It was a great deal for the buyer but he thought he didn’t have to pay me because there was no written agreement.  Well we went to court and it lasted about 6 months and about $80,000 in attorney’s fees.  I won but then they appealed my victory to the Illinois appellate court where there were three judges sitting way up high. There was a written brief presented by both sides and the judges listened to my attorney and then refused to even hear the other side because the case was so cut and dried.  So I won but only took home about half of what I should have because of the fees.  So, I always prefer to negotiate any dispute.

So, I am hoping that this week I will get very close to getting paid for work I have done over the last several years.  This slow down in our economy has not been any help at all; except for the ability to see a very good deal in a very tough time and being able to react.   I hope to be able to give specifics next week.  Keep your fingers crossed.

Yes, I’m a pilot and have been for 34 years; just the little planes and just fairly local.  I have used a small plane to photograph land sites and buildings before AirPhoto and Google Earth were around.  And besides, it was fun to do.  You also really learn the lay of the land and the juxtapositions to its environs.  You see in real life how the rail sits and where the highways fit in.  You get an entirely different perspective of the roofs and parking lots and how their condition has been maintained.

How does this relate to my land business?  Well, several years ago I scouted several sites for the Union Pacific Railroad when we were trying to identify their Global Three Intermodal location.  I flew out the Chicago Northwester rail line from just west of O’Hare to West Chicago where I picked out a possible assembly site for this Intermodal yard.  West Chicago said, “No thanks” So, we moved on.  The next areas I scouted was Maple Park, just east of their town.  There was a two mile stretch of rail with land on both sides of the tracks. We went after this with gusto.  There were 25 + owners of land and we had discussions with all of them after I found out who they were.  Again, we were shot down by the village when neighbors complained about perceived future congestion.  So, on we went to Rochelle.  I found a nice sized area west of town and Rochelle was open and welcoming to the idea of an intermodal yard.  The plane really helped.  Rochelle Municipal Airport or Koritz Field is just south of the proposed site.  That’s only about a 30 minute flight from Palwaukee, now known as Chicago Executive Airport; and again, a fun way to go; close to where I live.

To digress from flying and back to real estate, here’s a little known fact.  Railroads have the right of Eminent Domain.  The can condemn and take a piece of land if they need it for their use.  This was very helpful to the people who sold us their land because the availability of a 1033 exchange.  When a property is involved in a condemnation, the owner is allowed to employ a 1033 exchange.  We’ve all heard of a 1031 exchange where the owner has the ability to sell his land and park the proceeds with a Qualified Intermediary.  He then has 45 days to identify another “Like-Kind” property and 180 days to use the sale funds to purchase the new property and there is no taxable event to the person buying the new property.  The basis stays the same and only when he sells the new property and keeps the cash is he liable for Capital Gains Taxing.  With a 1033 Exchange, the seller has two years to identify a property and he has constructive receipt of the cash until he identifies and buys a new property.  Again, no tax implication until he keeps the cash.  The railroad worked with the sellers and made this an easy transition. You see, all the railroad or any condemning authority has to do is threaten to use eminent domain and the seller is eligible for this tax advantaged exchange.  So, if the railroad sends a letter saying they are going to condemn, the seller can then negotiate his best price and use the 1033 to best use the proceeds.

Now, don’t take the above as the letter of the law.  It’s just my summation and you should use a very competent attorney to execute a 1033 plan.

The retail world seems to be crying out for help.  Shopping centers going dark and being sold by the banks that have taken them back so they can recoup some of the lost loan value.  Take a trip along Randall Road in Kane County and McHenry County.  Every type of retail store you could imagine is located along this road.  And there are many, many vacant spaces.  Stores that aren’t closing are renegotiating their leases and the landlords are biting the bullet to keep the tenant in place. 

So, you wouldn’t think there is any new development of retail in the area.  And that’s true for the Randall road corridor.  But, there are selective developments in in-fill sites in very good markets.  I am currently involved in four such projects and, knock on wood; they seem to be moving forward.  All will generally involve a grocery anchor and a named pharmaceutical store along with a variety companion uses.  All are on sites between 8 and 15 acres and are very well located in higher end communities.

But even with all this, we still needed to be able to finance these developments.  Not so easy in today’s market.  The answer seems to be a strategic partnership arrangement where a “money Partner” finances the deal for a full partnership share in the deal without the reliance on an interest rate return.  So they are not the bank but a true partner with vast experience in the real estate business.  I presented the location to my development client and the team is formed with brokerage, construction management and money guy.  The old model relied on a master developer obtaining bank financing for a construction loan and that followed by permanent financing to take out the construction loan. The income from leasing the project is used to support the loan.  The money partner approach adds a degree of patience that allows the leasing to the right tenants for a better return on his investment.

At the end of the day, the partnership can elect to continue to receive the income from the property or they can monetize the cash flow at a good cap rate and sell the development at a decent price. Now, let’s hope we can get those leases signed!

Have you ever had one of those days where you’re waiting on some information to keep all your deals working?  Well, this has been one of those days.  There is a transaction involving a bank short sale on a 700+ acre land deal where a decision is due tomorrow.  There is a large building sale with the owner to respond to an offer I’ve made.  There is a retail development deal where the owner needs to make a slight addition to get it under contract.  There is another retail deal where the partnership agreement is in the final stage of execution.  There are new deals popping up and requiring attention.  Not that I’m complaining but the suspense is killing me.  I just have to keep following up on all fronts.

Enough complaining.  What am I supposed to talk about this week?  Oh yea, Ag land.  This is generally a positive situation for the long term farmer.  So farmers have had their land under contract with large residential home builders in the $75,000 range per acre.  Most of those builders have walked from the deals leaving earnest money on the table but also leaving the farmers wanting. Some had visions of selling and buying new lands that were 6 to 8 times as large.  Some have sold their land to a developer who has gone under and have bought it back at a 80% discount from the bank the was the developers’ lender. Not bad.  Sell 100 acres at $60,000 or $6,000,000 and buy it back from the bank at $1,200,000.

Generally, farm values for non-development farm land in the Midwest Continue to be strong. As reported by MGW (Martin Goodrich Waddell) in their current Farmland Seasons magazine, the “USDA reports cropland values up 3.2%in Illinois and 1.1% nationwide”.  Illinois cropland average price per acres in 2009 was $4,670 and in 2010 it was $4,820.  MGW said “agricultural land in the US presents a level of stability that is difficult to ignore”.  Also farm rents are up 3% and there is increasing buying pressure from china from an estimated 1.7 million metric tons of corn this year up to 15 mmt by 2015.  That would put China about equal to our biggest buyer, Japan. 

Another expected development, the production of cellulosic ethanol from biomass (switch grass and other non food crops), could be produced on less productive land and yield up to 1.3 billion tons of biomass per year.  That’s enough ethanol from biomass to replace 30% of the petroleum consumption in the US per year.

So, what does this mean to the buyers and sellers of Ag land?  Values will keep going up in general and in development oriented locations, there is no real pressure to discount the price of land unless you get a piece of the upside from the development.  Why sell at a low price when you can make from $200.00 to $300.00 per acre per year in farm rent.  So places with great soil are higher.  So, Mr. Farmer above will buy back his land from the bank and pocket $4,800,000.  Then he can rent it out to cover expenses and wait for the market to come to him.  The only slack for investors here is that 30% of farmers are over 65 Years old and will be selling their farms for retirement income.

I am seeing the stirrings of a recovery.  Not many of the big players, Duke, Opus, IDI or CenterPoint are stepping up to buy land.  In fact many have dropped positions and are looking to down-size even more.  But it seems that the downturn is slowing and folks are beginning to pick up their heads to see some light. 

Brian Carroll in this Augusts’ Benuzzi’s Industrial Guide stated that “There is good news from various reporting sources about the 2^nd quarter drop in available space from 160 million sf to 155 million sf, or 12.25% down to 11.8%.” “It can be stated that the run-up of available space may have abated and there is a bit of a positive feel.”  Jim Connor, in the same paper stated that tenants “recognize that this is the best buying opportunity that they have seen in the last 40 years in terms of prices and lease rates and concessions for real estate in the market place. So they want to step where they can and lock in for a long term.”  Mark Saturno said “I do think that Chicago is a critical point for distribution for most companies because of its great highway and rail infrastructure and its central location in the Midwest.

So, we see some reduction in available space, and tenants recognize the “buyers market” and the natural location and amenities of the Chicago area all bode well for a continued recovery.  The industrial developers will return and the economy will recover.  When?

Next week…Ag land.

I’m stealing this idea from Kim Ades the Frame of Mind Training Coach (kimades@frameofmindcoaching.com).  For her, September has always represented the beginning of a New Year.  Because it was the start of a school year, with new teachers, new kids in her class, a new haircut, a new wardrobe, and a year full of possibilities.

This year is no different... it's September and a New Year has begun - so many opportunities lie ahead to be excited about; deals to make, ideas to hatch, partnerships to form.  The possibilities are endless! This just the way I feel.  I haven’t closed a deal in so long because of the lousy economy but I am close on several and by the end of September, it will be a new year for me.  No more robbing Peter to pay Paul. It’s going to happen!

My current focus is on Infill land sites for retail development.  Here we find an underutilized 15 to 20 acres in a very high-end area and develop a grocery anchored center with a named pharmacy and the rest will just fall in place.  Financing has been the problem in this recovery but we have a well positioned partner that has the cash to finance these deals. We also often have land owners who want to stay in the deal and get a piece of the upside.  This helps our start up costs to stay lower than conventional buy and build alternatives. The land owner is given input into the design and becomes more than just a seller of dirt. 

I have four of these deals working.  Two are in contract negotiations and two are in the letter of intent stage.  The contract deals will close very quickly and the LOI’s will most likely close in early spring. All are very high-end developments in high profile sites.  Wish me luck!

Next week, I’ll get back to the industrial land world.  I am optimistic there also but that area needs more help and understanding.

Let’s talk commercial land.  Here we have mostly industrial developers being dictated to by their parent companies to get out of their land positions just as things seem to be turning around.  Let’s look at one of my favorite companies, IDI or Industrial Developments International.  This is truly one of the finest development companies specializing in industrial business parks in the nation.  Headquartered in Itasca locally and leaded by Tom George, a smart, industrious guy who has a gift of locating the best spot for the next development.  I have worked with Tom in locating and buying large pieces of land intended for the development of high-end business parks.  But, the vision has been blunted by the recession and the lack of support by the parent company Kajima Construction, located in Japan,  

Sell 50 Million dollars worth of land was the edict out of Japan.  This kind of blanket edict only reduces the good work done by the foot soldiers on the front lines.  Let’s look at Channahon, Illinois.  IDI put 125 acres under contract for about $55,000/ acre.  This site is located at a full four-way interchange on I-55, a future high-growth location.  The market went south and IDI was forced to bail from this project.  They were about to get final zoning and annexation of the site but decided to drop this development and leave $500,000 on the table that had been paid in studies and hard money to keep the deal alive.  Wouldn’t it be better to invest a small amount more and keep the deal going through the down turn rather then give up and through the $500,000 away?

In reality, the land owner was getting uppity because he sold the adjacent, much less desirable land for $60,000 to Mobil Oil and he didn’t need to negotiate.  It was tough to be a buyer in that situation.  But, let’s look at the Antioch Corporate Center in Antioch, Illinois.  This is a potential 200 acre development where IDI has paid for all the infrastructure to service the 200 acre site and has actually purchased 100 acres which has the roads and other improvements in place.  IDI’s deal is to take down another 50 acre is October of 2010 and the final50 acres in 2013.  The current thinking is not to proceed with the two additional take downs and let the farmer keep his land.  I think this is short sited because they have spent the money to service the site and improve it and these improvements will only go to the next buyer who  will most likely be a competitor.  Edicts from on high are too far removed from day to day life and should be tempered by the local knowledge of the leaders like Tom George.

Finished lots are those lots that are ready to build just by obtaining a building permit.  They will be and are the first to go and easiest to sell. They also represent the best return for the developer of these lots.  It used to be that 75% or more of the profit in a home came from the land development.  It was and still is the most risky part of the development game. The land has to be purchased, annexed, zoned, platted and then developed.  The land is now in the paper lot stage.  From here, the developer has to balance the site and extend and install all water, sewer and other utilities for each home site to be created.  The streets have to be put in and finished to all but the final lift stage.  Landscaping in the common areas has to be installed to get to the finished lot on which you can build.

This is where a bank would like to be if they take back a property.  But more often than not they get a blank slate where only some preliminary musings have been scratched out to justify the loan in more lenient times.  This is where the value can be added to a property returned to the bank.  Of course, the further the site is along in the process, the less work has to be done and the more valuable the land. This is where the progressive bank, do those exist, will support the additional expenditures of money to complete the development to the finished lot stage.  A good solution is for the bank is the sale of the note or repossessed land to an investor that has the deep pockets and can finish the development stage.  The best answer may be for the bank to establish a joint venture with a team of experts that can develop the lots and sell them to the home builder all on a fee basis.  This is less capital intensive and returns more to the bank.

Once the home builder has the lots under his control, the processes does not get easier.  The hurdles that the municipalities put in place are daunting.  The fees and costs that the developer has to pay have become ridiculous.  In Sugar Grove, Illinois it can cost $35,000 to $40,000 for school and municipal fees to pull a building permit for a single family home.  In neighboring Aurora, it can be half that cost.  It must be the address or is it just a growth limiting tactic?  In today’s market, many cities and towns are rethinking their impact fees and they seem to be headed in a more reasonable direction.  More next time

Wht is a bank to do with a repossessed land site. The bank can decide to hang on to a repossessed piece of land and work for a better return rather than just writing it down and selling it to an investor at a big loss.  There are several companies or partnerships that are targeting this type of asset.  I have set up a team that can do all the bank needs to in order to improve the value of the repossessed land.  I have teamed up with Manhard Consulting, a highly respected engineering and land planning firm to allow us the full understanding of the property and the process of getting the site planned and approved in the municipality that has jurisdiction.  I am using the services of Bill Laytin, the former corporate council for Neumann Homes with vast knowledge of the legal process needed to maximize the zoning for the site.  I am also using the services of Dan Flannigan, formerly with V3 Realty now with his own firm, Flannigan Realty.  Dan is an expert process guy who can guide a property through the system to get it to a saleable position. 

There are opportunities for the sale of “paper lots”.  These are the annexed, zoned and final platted lots that can be sold to a developer at a price above the raw land value.  So, there is a premium that the bank can realize by the sale of these paper lots.

Once the property is annexed, zoned and platted, it is ready for development into “finished lots”. A finished lot has all ground work and balancing of the site completed and utilities are in place and roads finished except for the final lift.  Storm water systems including detention ponds are completed and a builder can just pull a permit to begin construction.  At this point builders can buy one or more finished lots at a retail price that will return a profit to the bank.  My group, as yet to be named, would ask for a 5% fee based on the retail lot sale price. 

Who are the best buyers for paper lots and finished lots?  More next time.

So the bank wants the developer or barrower to keep their loan as a performing loan and pay their monthly mortgage.  The developer has no sales and cannot pay.  The bank calls the loan and the dance starts.  If the borrower is a small developer who does 10 to 50 homes per year, the bank has few choices other than taking back the property.  What then?  The bank can sell the land to an investor at a loss, known as a short sale, or hold and manage the land for the future value which they hope will equal the loan value.

An alternative is to hire a firm to manage the property and continue the development process to have finished lots for sale at a profit.  This manager can be the homebuilder who had begun the development.  After all, who knows the property better or has as good a working relationship with the municipality where the land is located.  No one has a more vested interest in the property than the foreclosed developer.  No one wants the development to succeed more. 

It often becomes a perception problem.  The developer has a “Bad Debt”.  But it’s not the developer who created the problem.  He is the real victim.  He wants to build homes and make a living.  The crash in the economy wasn’t his fault.  Yes, many developers bit off more land than they needed because land development was where they could make the most money.  If the developer is allowed to stay in the deal, everyone comes out ahead.  The original loan amount becomes the basis of the land value.  The developer continues to market the land and when they make the sale, they buy a lot from the bank at a retail value.  The bank gets the real value for the land and the developer stays in business and his employees keep their jobs.  The bank should stay in with the construction loan for the home and work with the developer to provide mortgages for the new home owner.  That’s three sources of income for the bank. But if there in an adversarial relationship between the bank and the developer, it becomes trying for all.

The other bank alternative is for the bank to partner with a land development company to complete the finished lot process and sell home sites to several home builders. More on this next time.

ReStart the blog and the business

What’s the good news today?  Listed below is part of an e-mail that I got about existing home sales from Ed Miles Main Street Home Mortgage Corporation.  It is a rebound but will it last?  New home sales data will be out this Wednesday and I’ll comment on them here.

"IF YOU BUILD IT...THEY WILL COME." And while that line from the movie Field of Dreams may have referred to a baseball field, there are some small signs that it could perhaps refer to the housing market once again before too long.

The housing market continues to show signs of stabilization, and although home prices are not about to spike higher, the decline certainly seems to have subsided. Existing Home Sales came in better than expectations, reaching their highest level in two years, as you can see in the chart below. Well, I'm not good enough to coppy the chart so here's an overview.

January = 4.49 M sales Nationally

February = 4.71M

March = 4.55M

April = 4.66M

May = 4.72M

June = 4.89M

July = 5.24M The highest level in two years!

With all the residential land deals crashing and the commercial developers selling off land and cancelling contracts, how can there be any accounting for land value these days.  I had a 125 acre farm under contract to an industrial developer in the western suburbs.  They invested about $500,000 in payments and due diligence when they decided to conserve cash and drop the project.  This may have been a good idea considering the drop in activity in the industrial market of late.  But what is the value of that land now.  Well the owner also owned an adjacent property of about the same size and of lesser quality.  He sold that property for $50,000 per acre.  I was under contract for $63,000 when the contract was dropped.  If the owner listed the property today he said it would be at $65,000 per acre.  No fire sale there.

And to look at recent farm prices, they seem anything but cheap. Here is a sample of farms for sale in DeKalb County from MGW Real Estate:

200 Acres near Shabbona for $10,500/acre

246 Acres near Sycamore for $19,000/acre

158 Acres near DeKalb for $8475/acre

190 Acres near DeKalb for $10,250/acre

Investors are snapping up farm land for future growth and an inflation hedge.  Farmers are adding to their holdings whenever possible because they know the value of the art of farming.  There is also the foreign buyer who is entering our markets and buying land to provide food for their people in the future. As someone said, they are not making any more of it so, land is a very stable investment. 

Land is always a good investment when it’s bought on a cash basis and you don’t have to pay juice on a loan to carry the land.  Also when it is well located, in the path of progress where you are sure to increase value over time. 

What’s around the corner?  A slow recover to be sure but what will the land product look like?  All the big boys have backed off land development unless they have real staying power and are not under pressure from lenders.  The future will be the absorption of thousands and thousands of fully improved lots, or land that is zoned and platted and ready to go.  Pods of finished lots will go first and as the market firms some developers will get back into the process of bringing fully improved lots to the market for others or their own account.

There are land investment funds that look to take out banks and work with troubled developers to provide the cushion they need to control the land and take it through the development process.  Avanti Property trust, Starwood Land Ventures and even operations like Ocean Atlantic are searching for the right deal.  All have large amounts of money to invest and all want tremendous returns on their capital. It is however, difficult to make these deals work because a return of 15 to 20 % is needed by these funds to risk their money.  They can’t buy land at asking prices because they have to cover the down side if all things fail.  The latest key phrase is “we have to buy at farm prices”.  That is $6,000 to $10,000 per acre.  It’s tough to get someone who had a contract with a builder for $60,000 per acre to drop their expectations.  And it’s really tough to get the Bank who lent $50,000 per acre for the developer to buy that land to write down his loan to those levels.  It is only when the Fed pressures a bank to monetize the collateral that these prices can be reached.

Many banks are finding it better to take back the assets and wait for the turn around.  Some banks are hiring the finish up experts to take a half finished piece of land and get it to the finished lot stage where the value is much higher and there is hope of selling off some assets at a decent price.

Some developers are taking advantage of specialty products offered by the more sophisticated funds.  Avanti has a product where they will take down a property and provide 90% of the money for the land and for the development on a non recourse basis.  The intent here is for the fund to make its money and the developer to stay in the game and keep his building operation going.

With the housing market firming and the people who control the land getting more realistic in their valuation of the land, things will start to move.  We’ll look at office & commercial land tomorrow

What’s next after the land value increase pushed by large residential developers. The market correction is in full force or should we say in free fall.  The signs of the end are near with home sales firming and some new housing starts.  This still is a market where values are based on what one can do on their land.  What is the impact of the land glut on current developments? 

Let’s look at developments in Antioch, IL.  A developer of entry level homes went into bankruptcy and the lenders are taking back the development.  How does the investor determine what he can pay to buy this out of bankruptcy?  There is an existing agreement with the village that binds the project to develop and maintain a clubhouse for the project but there are no homes and no income to support the clubhouse.  There are also requirements to complete the infrastructure including storm and water systems and there is an SSA (Special Service Area) that requires the development to pay a tax for each home or planned home to repay bonds issued for the sewer system put in place for the development of several projects in the area.  So it is a real conundrum as to what a new investor can pay for this land. 

Whatever the price is, it will be cheaper than the adjacent properties have paid because they have all those costs and the cost of the land paid in a good economy. So, in valuing the land,  you have to consider the adjacent developments and realize that they will write off the land profits to keep the housing costs down and keep their development company in business.  So even if the investor in the bankrupt project got the land for free, the cost to get to a finished home will be more than the existing developer because of the cost of getting the project on equal footing. 

So, the bankruptcy court has to remove some of the burdens that go with the land to help get a project moving.  And what happens to the good developer who has struggled to keep his business afloat?  He is facing some subsidized competition that is unfair.  We’ll see how this plays out through 2010.

Land Shark

This is the start of something that I’ve been trying to do for awhile; write an informative blog about the goings on in the business of land based real estate.  Since the crash started in 2007, the value of land has disappeared or so it seemed.  It started with the large national players taking huge land positions to feed their development needs.

The large developers and most residential developers in the starter home and first move up category found that about 75% of their profit on the sale of a home was from the land development and site improvements put into the farm land they purchased. The balance was in the “bricks and sticks” of the homes.  We’re talking profits here not total costs. 

Developer “X” buys a 100 acre farm for $60,000 per acre.  He can develop about 5 homes per acre and it costs about $2.00 per square foot to improve the land for these homes, or about $8,712,000 for the improvements. So, the total land costs of the development are $14,712,000.

If the average home price is $250,000 and about 25% of that total price is the land component, then the value assigned to that component is $250,000 X 25% = $62,500 per home.  Thus the total value assigned to the 500 homes in the development is $31,250,000. If you subtract the cost of land at $14,712,000 the profit for that component is $16,538,000 or a 47% profit on the land portion of the home.

This is why the land development business was such a boom and it turns out such a risk when the demand stops and there is nothing to do but give the land back to the bank.

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