AMA – Developing 100 Acres
Welcome to the Real Estate Espresso podcast, your morning shot at what’s new in the world of real estate investing. I’m your host, Victor Menasce.
Today is another AMA episode, that is, Ask Me Anything. I’d love to answer your questions, and if you have a question you think is going to be of broad interest, send it in. I’ll answer it live on the air. Send your questions to Victor at victorjm.com. That’s Victor at victorjm.com.
Today’s question comes from Zane who writes, “I’m hoping you can give me some insight for a problem I’ve been struggling with. I’d love to get a professional opinion or suggestion on how I could approach an issue with a small-town council who won’t update utilities and a seller who wants a premium price for their land but can’t get it because utilities are maxed out.
“I am a residential and small multifamily investor and my knowledge of selling land for development is minimal. I’ve known the seller and their family for years and they trust me to represent them honestly, which is why they asked me to list their land.
“It’s been a year, and the few interested buyers we’ve gotten are bidding too low for the seller, and then the City Council ruins the due diligence. It’s a hundred-acre tract on two parcels in the city limits of Maysville, Georgia, just off Interstate 85 close to Atlanta.
“The seller wants to get around six and a half million for the sale, and I’ve warned the seller that maybe four million is more likely, but it’s not a conversation the seller wants to hear. The land has 18 acres of C2 zoning on the main road with major utility lines on the road. It’s the largest undeveloped piece of land in the city limits.
“Jackson County’s growing rapidly and building a lot of housing, but the city of Maysville has been underdeveloped. They did just approve two large data center projects, which I think will jump start the city into more growth. The city utilities have water pressure limits due to poorly functioning wells, and the council is fixing the issue by purchasing water from surrounding counties.
“Sewer lines and the reclamation facility are maxed out for residential use but supposedly have retail and commercial capacity. There have been several offers at lower prices. They’ve all failed in due diligence as a result of the lack of utilities.”
Well, Zane, this is a great question. You sent an extensive list of documents along with your question. A few things I notice off the bat:
Number one, the community is small with only about 2,000 residents. That means there’s an abundance of land all around you.
Number two, you’ve got the Tanger Outlets right at the I-85 interchange, which is definitely a source of commercial traffic and employment. You’re about 30 minutes from Athens, Georgia, and an hour to Atlanta.
Any developer is going to look at land value from the perspective of a shovel-ready parcel. It’s not just about zoning; the infrastructure will determine the ability to develop the property.
Any developer will perform what’s called a residual land value analysis. That means working backward from the sale price of the finished product. Maybe it’s a home, maybe it’s a townhouse. They’re going to subtract their profit, subtract the cost of construction, subtract the cost of designing and carrying the project, subtract any improvements to the land, and what’s left over is what they can afford to pay for the land.
It’s not surprising to me that the town doesn’t have a lot of infrastructure. The data center projects will definitely tax the town’s infrastructure. Data centers use a ton of water, and perhaps they’re going to develop their own water resources on site.
If the data centers are of any size, they’re going to use way more water than the entire town combined. So there will be two components. First, they’re going to need to filter and treat the water to prevent corrosion inside the cooling systems. But most of the water will be lost to evaporation, which means they won’t be taxing the wastewater treatment plant hardly at all.
There are always choices when it comes to providing utilities, but if you’re within the town boundaries, they’re still going to be constrained by what the town is going to allow.
Most municipalities allow for developers to improve the town’s infrastructure at their own expense, as long as the improvements meet the town’s standards, and then those improvements are donated to the municipality. If those improvements support more than the specific development, then future users of those improvements could pay a reimbursement to the original developer for their share of those improvements.
For example, if you build a road or a sewer line, any of those improvements could be subject to what’s called a late-comer agreement.
It’s also possible to add a captive wastewater treatment plant. These are not that expensive. I built one in Louisiana for a few hundred homes, and the plant cost me about a quarter million dollars. Now, these days, the standards generally require a full reverse osmosis system. That’s going to run you around 12 to 16 thousand dollars a unit, which is not a terrible price compared with a septic system.
The initial cost will be substantial, probably a couple of million dollars. It will give you the density that would make sense.
What really stands out to me is that the seller is taking an all-or-nothing approach to the land. Land that is subdivided and ideally suited for the end use is always going to be more valuable than land which is being sold as raw land in a single tract.
You have several different products here, and if the town is saying that water is available for commercial but not residential, then I would start with the commercial.
The land cost right now at a six and a half million dollar purchase price comes to about a dollar fifty cents per square foot. That’s definitely at the low end of the range for residential land.
Now, if you’re eventually going to build each townhouse, that lot is going to be probably around 25 feet wide and maybe 120 feet deep. That means about a 3,000-square-foot lot. This would definitely be considered high density for a small town like Maysville.
Even if the gross land including roads and buffers is double that, you’re only talking about a raw land cost of an average of maybe $9,000 per townhouse. That’s pretty low. The servicing cost will dominate the land cost by a wide margin.
The other factor to consider is the geotechnical. If this was agricultural land at one time, as it appears to be, there will be a fair bit of organic material, which is fine for building gardens but not great for building roads and homes. That could result in a lot of exporting material that’s not suitable for building, and an even larger amount of import to make the land suitable for carrying a load of buildings and roads.
Understanding these costs will determine whether the land has development potential with the current prices in the market. The real question is not the land cost, but it’s the cost to get a shovel-ready lot, and that’s going to require a lot of investment far in excess of the existing price for the raw land.
So when I look at the topography of the land, there is a low area in the middle of the property with two ponds. That’s concerning to me. When you build, you’re adding impervious surfaces like buildings and roads. The excess water that’s caused by those impervious surfaces can’t be absorbed by the land. It’s gotta go somewhere, and that’s likely to cause flooding on parts of the property.
That’s going to require an extensive stormwater management plan, and you might not be able to achieve very high density unless you can get rid of the excess water. These are all the types of considerations that come into the design of a planned community. Even a change in government or a source of funding won’t solve those problems.
If extracting value from the property is the goal, which it sounds like it is, then I would spend a few dollars on figuring out how to subdivide the property. You might not get a dollar fifty per square foot for the property as a whole, but with proper planning you might get, I don’t know, four to five dollars a square foot for a subset of the property that can be developed.
If you can’t get utilities at all, then the land is worthless. But if you can get utilities and an allocation of those for a subset, then the scarcity of utilities just made that subset of land with the utilities a lot more valuable.
I would definitely consider subdividing and developing a master plan with the town council and the engineering division that the city can get behind. The key would be to develop it in phases.
I want to thank you, Zane, for a great question, and for listeners at home, have an awesome rest of your day. Go make some great things happen, and we’ll talk to you again tomorrow.
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