Changing Land Use to Achieve Maximum Profitability
As investors, it’s vital for us to make the “highest and best use” of our properties. In a global real estate sense, this phrase is defined as the use of a property that makes it the most valuable to a buyer or the market.
From a purely business point of view, it means one single use will result in maximum profitability through the best and most efficient use of the property. So, it definitely pays to know the various ways in which to change land use to get that maximum profitability. In this article, I’ll describe several methods for achieving this objective.
Method 1: Assemblage This is the combining of two or more adjoining lots into one larger tract to increase their total value (”plottage”). You can more efficiently develop the larger tract and increase its value through redevelopment. For example, you might buy several small tracts and combine them into one large lot in order to build a multi-unit apartment building or a commercial structure.
Method 2: Lot Splitting This is the opposite strategy of assemblage. You take a large tract of land and divide it into several smaller tracts. The result is that you can receive a much larger income than you would if you kept the land as-is. One common technique is to split a large tract into several tracts and put small multi-unit (1-4) residential properties on each. This way, you get more favorable financing as well as income.
Method #3: Conversion of Use This is simply taking the use of a property and converting it to another use. An example is buying an old storage facility, renovating it, and then converting it into office space. In an ideal situation, you get the original property at a low price and gain the rewards of long-term income and appreciation.
Method 4: Zoning This can be a very profitable strategy in areas where there are expanding populations. For example, assume your city is growing outward toward agricultural land, and you’ve identified this land as being in the path of progress. This means the land becomes less productive in real estate terms; i.e., it now doesn’t have its highest and best use. So, you buy the farm land and then get it zoned for residential, commercial or industrial use. Since it’s in the path of progress, the land you purchased should leap upward in value, assuming you’ve done proper due diligence
Changing Land Use-The Negatives Sometimes, the biggest obstacle to changing land use is dealing with local government bodies (planning departments) and local communities. For example, you may run into communities where holding anti-development attitudes. If that’s the case, you could have a costly legal battle on your hands when seeking to change land use. The solution is to do your upfront research on the local conditions and attitudes. Find out if the planning commission and the community are pro-development or anti-development, and then make a decision as to whether or not to proceed.
Another potential negative can be your own ignorance. Assume, for example, that you buy a piece of land in order to attract commercial businesses and later find out it’s zoned only for residential use. The solution is to do your research and do it carefully so you avoid this situation altogether.
Conclusion When you’re involved in commercial real estate investment, the changing of land use can be a valuable tool for increasing property value and income. As I said earlier, the key is to take the temperature of planning commissions and communities in order to determine their attitudes toward development before you ever proceed with your plans. If the attitude is pro-development, then you’ll have relatively smooth sailing. If it’s anti-development, you’ll have to decide if it’s worth the time and expense to fight the battle that will likely ensue. As always, consider the situation in an objective manner.
Key Point: Keep a sharp eye out for changes in land use that can increase the value of your properties.
Filed under: Finance