Land selection is fundamental to success in value creation, without the land, a project is impossible. Closing the deal itself is among the most easily accomplished steps along the journey, because it is transactional, finding the right deal however, that can be a challenge. Deal finding strategies are covered elsewhere, this post assumes the quest for land is ongoing, a few candidates exist, all with promise, and the task at hand is choose the best candidate, unless something really good comes up that must be moved on quickly. The purchase of land sets in motion a chain of events that really impacts the future life of the buyer, a substantial time commitment to carry through from raw land, to realization of a finished project is a must. Land, once purchased, is to me at least an irrevocable commitment. It means a cascade of events is ordained, starting with design, then permitting, and construction. Once ground is broken, there is literally no take-back without incurring a loss. My first couple of project could be considered a Machiavellian death match, sink or swim, all in, win, or be laid in the dirt, and attempt to explain to the spouse about that million dollar personal guarantee she signed. I’ve since grown more risk adverse than those early days, with more to lose. Regardless, the problem with finding a great deal, and signing the deal, at that stage the investor cannot possibly know the future outcome of the cost to execute. There is no possible way, for a new investor to go from locating a hot listing, to determination of the likelihood of the value creation potential within a few hours available to signing a firm contract. Essentially you cannot properly underwrite a complex project within the time available to choose whether or not to purchase the property (in a hot land market, which is common). I do recall a land deal made while walking my dog at the paskapoo slopes park, before the walk was over the contract was reviewed and signed. Did I have time to sit at a computer and ponder some spreadsheet on cost to complete? Obviously not, at that time the instinct to purchase was strong, and the outcome two years later was a successful tale of value creation. How did I sign this deal with complete confidence and no regrets? I incorporate some meaningful tactics to increate my level of comfort with the deal.
Fundamentals of infill land selection include the following;
Grade of Land - I like to use a letter based criteria, based on location and fundamentals. A,B,C etcetera. I have a tenant profile in mind, and assume what aspiration they would for have for their house that I can exceed, or at least fulfill. Technical factors related to servicing, proximity to amenities, reputation of the community or area, park space, walkability, supply constraints, employment centres, all of this factors in and a letter grade can be assigned to distinguish among sites. A common misconception is the most expensive or prestigious community is grade A. Often those estate areas present real difficulty, or the buy in is too high, or zoning problems prevent development. We don’t need the best lot to create value, often, a good lot, grade B or B+ is ideal.
Utilities and servicing - this is a major factor, power lines, access points, laneways, slopes, soil condition. Any technical factor is considered here. I would go so far as calling my deep services contractor for a little chat. I’d guesstimate the likely troubles with enmax, and the likelihood of getting utterly screwed by the power situation. I’d use my construction omnipotence to come up with some number about how the city staff will delight me with unwarranted surface improvements. I’d throw in a huge number for dealing with storm water fees and site work, and then cry a little. I’d use a qualitative approach to the total servicing compliance cost, such as, will the perceived cost be more than, or less than, the pre tax annual income of my spouse. That will add or subtract a letter grade to the quality of the deal.
size and unit program - if the site is somewhat unconventional, which tends to be the type of site I like, I’d factor in the gross area, examine the bylaw for density per hectare, and determine, after subtracting parking, what my footprint size would be for each unit, and how many units are achievable. Given the nature of these projects, I may have some desire to hit an abitrary number, like five, to make CMHC financing possible. A land deal where five units cannot be realized would be downgraded. A deal where five units would be possible without needing basement suites would be upgraded. More parking would always be preferred over less, and frontage tends to be preferred over length, and flatter rather than hill slope is better for controlling cost
Proximity to amenities - This criteria is subjective, yes, so I attempt to apply some ridiculous quantitative aspects to it. For example, is the community considered in the media to be ‘trendy’. Trendiness is good marketing speak for attracting quality tenants. Inglewood and Kensington are among the select group of oxymoron communities perpetually labeled trendy. It does not matter that the definition of trendy is to be influenced by most recent fashions or ideas, in infill development, typically only the older, smaller communities are perpetually trendy. The newer sprawl communities are attributed the degree of trendiness that Hillary Clinton would have assigned the voting potential of deplorables in a flyover state. Trendiness is correlated to walkability to independent shops and services and distance from the Walmarts and Mcdonald’s franchises. Identifying ‘trendiness’ seems to require gourmet coffee, boutique ice cream cones, and wood fired pizza pies. If the price of a serving of coffee is more than $5, or cone of ice cream is more than a quart of hagendaz, likelihood of trendiness is strong. Some communities are defined by proximity to trendiness. For example, the realtors are so beholden to the magnetism of trendiness, they cannot help but attempt to appropriate adjacency of trendiness when mis-representing development potential of a property. For example, every MLS listing in the community of Renfrew attempts to co-opt the trendiness of Bridgeland in the listing description. Does this mean Renfrew isn’t any good to develop, no, it just means Bridgeland is much preferred. A property listing in Bridgeland has never declared proximity to Renfrew to be a feature, because Bridgeland can be advertised using its own merit, whereas Renfrew has fewer trendy elements. And yes, I did develop one of the best parcels in Bridgeland and thought of this at the time. I simply avoid communities I dont see strong potential in, I look for capital appreciation and great tenants, grade C areas are not my forte.
Supply Constraints - A ground oriented townhouse in certain areas is the real estate equivalent to a moat for a Buffet owned business. There are simply few land deals available, or ever will be available, constraining the type of supply that I like to develop. While the city may be enlightening itself on infill building rules, it doesn’t mean the good locations will ever have a surplus of incoming supply. The savvy buyers from Ontario will snap up those volume D rated deals near Balzac, I will stick to communities rated A or B due to land constraints.
Available funds - with the slow moving nature of acquiring financing, it may not be possible to line up the right type of debt to allow a land purchase. Plenty of banks won’t touch a land deal, and those that may, you’ve got to have some pre-existing relationship. If a hot deal enters the market it is best to make an unconditional offer anyway, as the seller often has multiple buyers, inevitably one with cash. Offers with quick possession dates are often selected first if the seller is motivated, again, it appears unconditional cash deals work best to tie up these lots. Plenty of the deals contain old houses and are not even suitable as rental properties, the reason they hit the market is they are in such poor condition it makes no sense to repair them. If I have no means of closing the deal promptly, I likely need to pass on the opportunity, rather than jeopardize assets partly built to chase volume.
Cost of inventory - This is a new project and business killer. In the past, during the cheap money era, it was better to hold more inventory because the nice lady at the bank was offering you 0.25% on your cash. Since you need access to the cash quickly to acquire land, most investment types that lack instant liquidity or have market risk are poor options while searching. Now, with cash earning 5% or more, buying land, holding it, paying property taxes, etc, with the risk free rate being so high, the land will cost the builder 10% per year to hold a property, or more. This incredibly expensive additional land cost gets magnified if the builder needs to hold more than one lot (which I do). At this moment in the market, it appears better to only hold land that can be put in production immediately, and take the risk that something can be found in the future, even at a higher price, than to buy too much land today, harming the war chest needed to actually execute a build.
Many of these land selection criteria are simply related to experience in how I want to develop, and in what areas. I certainly don’t want to be spread out over this massive city, that is a management problem. I’d not tend to develop in an area I consider to be lower in grade than a ‘B’. And a ‘B’ can be different from investor to investor depending on how the criteria are weighted. A consequence of building in these trendy areas is the land deals are small, and scale is rarely possible. I prefer the type of project without basement unit, contrary to the dominant form of infill development now common. As the city makes RCG and HGO projects easier to permit, perhaps more land will become available, but it still relies on a willing seller and a house economically viable to demolish and rebuild. Most of the inner city is good to invest in, with long term appreciation and inflation protection almost a guarantee, these communities are all small and well located. The land tends to remain the biggest single component of a project cost, but in my experience, not a category to skimp on a few dollars, if a trendy location is only a few percent more in cost than a non trendy area, buy the quality first. Make sure when you are marketing your completed units, to describe how trendy, or at least trendy adjacent the area is!