On today’s show we’re talking about the lowest and best use of a property. Traditionally, we are trained as real estate investors to seek the highest and best use for a property. This might be a high rise building, or a hotel.
But sometimes, the best use is the one that buys you certainty. That may not necessarily maximize the revenue. Sure you want to build that hi-rise condo tower on the property. But you won’t know for some time if the zoning is going to be approved. In the meantime you need a way to carry the property during that period of uncertainty.
For some properties there might be an existing single family home on the property. But the rent for a single family home probably won’t generate enough income to cover the costs of a property that is valued for development of a major property. You don’t really know how long it will take to get the entitlements. On paper the city might say its a four month process. But by the time the concept is developed, the required traffic studies are completed, public consultations, submission of 15 copies of the drawings 30 days in advance, you could easily be facing a six month process before the zoning board. Chances are, there will be some objections to the minor variances. If you require an appeal or a resubmission, then you could be easily facing another 3 months delay. Once you pass the zoning board, then you might be facing another delay to get the project on the agenda at city council. All of this uncertainty means carrying a property without the knowledge that you are gong to be approved. OK, so now you’ve got zoning approval to build the project. From here you can start the detailed design of your project, the full construction drawings will take several months to complete with all of the engineering aspects including civil, structural, mechanical, electrical, plumbing, acoustic. Once that’s all done, you need to satisfy the long list of deliverables for the actual building permit including the demolition permit, the stormwater runoff permit, the road closure permit, the sign-off from the fire Marshall and so on. That entire process can take several months. Then you’ve got to get firm construction bids from all the subcontractors. That entire process can take a year. So now you might be two years into the process and you haven’t broken ground. What do you do? How do you carry a multi-million dollar piece of land with no income? How do you raise the capital for the entire project before you even know if its going to be approved? You don’t even know what its going to cost to complete the project.
So what is the answer?
If your property is in a desirable area with a shortage of parking, you can create a surface parking lot. A surface lot is relatively inexpensive to build. I’m not talking about a monthly parking lot. I’m talking hourly parking. You install a payment machine and you have a security company visit the property on a regular schedule to enforce the parking. If your area has a shortage of parking, you should be able to charge $3-4 per hour for parking during peak times. You should be able to average $20 per day for a parking space in a downtown location.
Parking spaces consume an average of 320 square feet including the parking spot at 200 square feet, plus the space for the laneway.
The beauty is that most zonings do allocate for parking. Getting a parking lot approved is relatively easy in most cases. A property that is actually an income producing property like a parking lot is easier to finance than vacant land. This can be one of the least expensive ways to land bank during the entitlement process.