One of the basic strategies used by land developers across the country is to buy a tract of land, subdivide it into smaller parcels, then sell those parcels at a higher price per acre (or square foot) than the tract originally cost. Here’s a simple example: You could buy a five-acre tract with single-family zoning for $20,000 an acre, subdivide it into 17 quarter-acre lots (leaving three-quarters of an acre for common areas), then sell those 17 lots to a home builder for $20,000 each. That means the land that cost you $100,000 will sell for $340,000. But with a slightly different approach, you can earn your investment back and create a perpetual revenue stream.
Kent Densley, vice president of land acquisitions and sales for Whitney Education Group, Inc., explains the approach this way: Buy the raw land, subdivide it, and sell most of the parcels to pay back your investors and loans, then build on and lease the remaining parcels for a virtually infinite return. As long as you own those parcels and buildings, they can generate income for you and your investors.
Densley, who also teaches advanced land development training for Wealth Intelligence Academy™, is currently coordinating just such a project in South Fort Myers. The end result will be a heavy- to light-industrial use commercial park. Half of the required capital is being raised through a private syndication; the other half is bank financed. The project consists of 30 acres that will be subdivided into 24 one-acre parcels, with the remaining six acres being used for infrastructure (roads, surface water retention lakes, etc.). The developer will construct the roads and drag water and sewer to each of the sites.
“Of the 24 lots available, we will sell 21,” Densley says. “This will allow us to retire all of the bank debt and return the investors’ initial cash equity. We will have three lots left that we will develop and lease. The equity in those lots will be used for whatever financing may be required for the construction. Then the revenue from the leases will provide the investors with a return in perpetuity.” The remaining three lots will be built out according to the requirements of the tenants; the project does not include any spec building by the developer.
Investor funds for the project are being raised through a Securities and Exchange Commission (SEC) Regulation D offering which includes a Private Placement Memorandum (PPM) that explains the entire project in complete detail. It can be presented to any accredited and suitable investor. Densley notes that the SEC defines an accredited individual investor as one with a $1 million net worth or combined income of $300,000 for the past two years. However, he says, you could use the same strategy with a less-formally structured partnership that would not include a Reg D offering and your investors would not have to meet the SEC accreditation standards. Of course, before launching any project that involves raising capital, it is best to discuss your plans with your attorney to be sure that you are compliant with all applicable laws and regulations.
Densley says this strategy can work with any parcel of land when the sum of the parts is worth more than the whole. Even though the project he is currently developing is heavy- to light-industrial use, the technique can work on land with virtually any type of industrial, commercial, or residential zoning. You can sell enough of the “parts” to just recoup your costs and then develop and lease the remainder for cash flow or even your own use, or you can sell more of the “parts” to create a short-term profit, still keeping some land for long-term revenue.
“In terms of risk, this strategy is reasonable and identifiable for both the developer and the investors,” Densley says. “With the project we’re working on now, the only risk is buying the land and bringing in the roads and utilities. We’ve done our homework, we know what the market potential is, so we’re confident that the risk is low, yet the potential return is tremendous.”
Using this strategy is a straightforward process, Densley says. Find the land, get it under contract, conduct your due diligence and determine that your plans will work (engage a land use planner and an engineering firm for this), and close the deal.