Land investment

[benchmark]

I got pitched an investment on land in the city of Lancaster. Since I have no prior exposure on this, I'm wondering if there is any good books on this? and what's the general rule of thumb (like CAP rate for rental, etc.)?

 

Thanks and happy holidays.

[moody202]

What was the sales pitch? What did the say you will get out of the investment?

 

I got pitched an investment on land in the city of Lancaster. Since I have no prior exposure on this, I'm wondering if there is any good books on this? and what's the general rule of thumb (like CAP rate for rental, etc.)?

 

Thanks and happy holidays.

[benchmark]

What was the sales pitch? What did the say you will get out of the investment?

 

I got pitched an investment on land in the city of Lancaster. Since I have no prior exposure on this, I'm wondering if there is any good books on this? and what's the general rule of thumb (like CAP rate for rental, etc.)?

 

Thanks and happy holidays.

The pitch is that you can get at least 4x return in 5-10 years.

[Rainforesthiker]

Are you talking raw land?  Raw land would not really have a rental rate, so I am presuming this is developed land?  If it is developed land, then what is on it?

[oddballstocks]

Lancaster what?  In the Midwest/East there's a Lancaster in most every state.

 

Sounds like the pitch was fairly aggressive.  I'd ask if the return is so great why hasn't the sales guy gone out, leveraged up and purchased it himself?

[AzCactus]

Lancaster what?  In the Midwest/East there's a Lancaster in most every state.

 

Sounds like the pitch was fairly aggressive.  I'd ask if the return is so great why hasn't the sales guy gone out, leveraged up and purchased it himself?

 

+1

[SmallCap]

has anyone on this board ever been "pitched" what ended up being a good investment?

 

I am massively skeptical of any investment that I am being pitched. why would they go through all the bother of pitching me one something instead of taking advantage of it themselves.

[thepupil]

http://m.youtube.com/watch?v=8kZg_ALxEz0

 

Anyone else think of this?

[DanielGMask]

I got pitched an investment on land in the city of Lancaster. Since I have no prior exposure on this, I'm wondering if there is any good books on this? and what's the general rule of thumb (like CAP rate for rental, etc.)?

 

Thanks and happy holidays.

 

Use your common sense! 4x return in 5-10 years in real estate doesn't sound very probable, though it's not impossible. There's a comment down the thread that says that if it's so good why the pitcher is not taking advantage of the opportunity for himself and that's usually a good question to ask to those selling "opportunities".

[oddballstocks]

http://m.youtube.com/watch?v=8kZg_ALxEz0

 

Anyone else think of this?

 

Yes!

[ragnarisapirate]

I got pitched an investment on land in the city of Lancaster. Since I have no prior exposure on this, I'm wondering if there is any good books on this? and what's the general rule of thumb (like CAP rate for rental, etc.)?

 

Thanks and happy holidays.

 

Use your common sense! 4x return in 5-10 years in real estate doesn't sound very probable, though it's not impossible. There's a comment down the thread that says that if it's so good why the pitcher is not taking advantage of the opportunity for himself and that's usually a good question to ask to those selling "opportunities".

 

As is mentioned, this isn't impossible... 4x return in 5-10 years. If it takes 10 years, thats 29% a year in the best case scenario... is that really that unheard of on a single deal? over a whole portfolio, its rare, but on a single deal? No.

 

4x money in 10 years is just ~14% annualized... that ain't unreasonable, especially if there is leverage (think the building in NYC that Buffett bought into with his personal holdings)

 

It totally depends on the nature of the pitch though. Size would have a lot to do with it (it's a lot easier to generate high returns with a sub $100K property than a multi million dollar property). In this interest rate environment- that kind of deal is unlikely, though, there are instances where that can happen.

 

A lot of times lending against real estate doesn't neccessarily go to those who can put together interesting deals: it goes to those that meet a check list that a bank (and more specifically, its regulators) want to see. I think it's a mistake to say that the pitcher of a transaction is guilty of malfeasance without analyzing the details of the pitch first. After all, say that a fund manager on here was pitching a stock idea to a client- would you judge them with the same criteria? Many of the ideas on this board have (easily) yielded the same returns that are being pitched.

 

Would you care to post the investment details?

[mcliu]

4x unlevered on land? That sounds pretty impossible..

[benchmark]

Lancaster what?  In the Midwest/East there's a Lancaster in most every state.

 

Sounds like the pitch was fairly aggressive.  I'd ask if the return is so great why hasn't the sales guy gone out, leveraged up and purchased it himself?

 

CA

[benchmark]

Are you talking raw land?  Raw land would not really have a rental rate, so I am presuming this is developed land?  If it is developed land, then what is on it?

Yes, raw land, though lots of lands around it has been approved for housing and/or commercial development.

[moody202]

If they are hiring sales people to sell it to you, I don't think there is value there.

[Packer16]

If we can get some details that would help.  Those rates of returns on land in the right area at the right time are not unheard of.  Remember land is like an out of the money call option on the price of real estate in a region and if you get non- recourse financing it is like a call on a call.

 

Packer

[Morgan]

It is definitely possible to earn those returns, but with bare land it seems pretty close to speculation. If you know something about the future use of the land then maybe it's a good buy.

 

With RE developments there are so, so many things that have to come together nearly perfectly to make a project happen. If you want to invest in RE I would suggest something that is going to generate cash the day you buy it. My preference is residential RE. I sort of see buying up apartments as stepping over lots of one foot poles whereas this type of 5, 10, 20 year development projects are like jumping over many, many seven foot poles. I'm short, so one foot poles are more my style. But to each his own.

 

Over all, it is possible, but the spectacular, once in a lifetime opportunity type return scenario is much more psychologically alluring than making 10%-15% pretty securely over a long period of time. That is another thing to take into consideration; how they're marketing it.

[benchmark]

Would you care to post the investment details?

 

The asking price of the parcel is $2.50 per square foot, and this is not a leveraged play -- you have to put up the cash to buy the parcel outright, and hoping that some of the comps below becomes a reality...i.e., going from $2.50 to $8-$15 per square foot.

 

 

1) Inside 735 acres Mixed-use zone district. Mixed-use can allow to build up to 4 floors with combination of commercial, business office and residential development. Excellent exponential multiple for the highest land use.

 

2) Parcel is close to two regional artery Ave I and Ave H, at half section, very visible location and allow to build up to four floors buildings according to mixed-use zoning. City last year spent $12M to improve Ave I infrastructure, widening road, paved, add traffic light, sewer and built ramp-up area. As you see, after Ave I infrastructure improvement, the land price keeps to move up from $5.50/sqft at 2011 to $12.5/sqft in 2012, to $18.5/sqft in 2013 and $35.0/sqft in 2014 along Ave I.

 

3) City has three mixed use areas. Other two mixed use area Lancaster Downtown and new 157 acres Armargosa Shopping Mall have been in the development phase now and land price for other two mixed-use areas already $8-15/sqft. This is last remaining mixed-use area in the city of Lancaster and in the future it will be city commerce center and commercial area and new downtown area.

 

4) Just walking distance 1.0 mile Northwest of Lancaster First Wal-Mart Super Center at Ave I and 27th Street West.

 

5) Just 1.2 miles Lancaster Market Place, a great outdoor shopping mall, which is located at Ave I-4X25th Street West, please check website http://www.lancastermarketplace.com/index.html

 

6) 0.5 mile South of Fox Field Industrial Corridor Project, an 8,238 acre master-planned industrial complex currently being developed which will create a lot of jobs and attract a lot of business and commercial developments. Commune from the parcel mixed use development area to working place is only 3 minutes.

 

7) About 3.5 miles Northeast of the approved “The Commons at Quartz Hill” commercial development project including new Super Wal-Mart located at Northwest corner of Ave L & 60th Street West. This is 5th Wal-Mart and is just approved at July, 2009.

 

8) About 2.5 miles Northeast of commercial shopping center development project at 60th Street West and Ave K including home supply store LOWE’s development etc.

 

9) About 3.6 miles Northeast of approved “The Commons at Quartz Hill” commercial development “Target” shopping center project which is located at Southeast corner of Ave L & 60th Street West.

 

10) 0.5 miles Northeast of approved 177 single family housing project (TTM 63282, Ave H-8 to Ave I X 40th to 41st Street West.

 

11) Adjacent to the approved 175 single family house project (TTM 062793) which is located at Ave H-8X37th to 40th Street West.

 

12) 1.3 mile Southeast of approved 655 house lot project (TTM 62759) which is situated at 160 acres of Southwest of Ave H and 50th Street West.

 

13) 0.5 miles to the existed finished 143 house lot project (TR060858) which is located at Ave I and 42nd to 45th Street West.

 

14) 1 mile North of Approved 316 single family house project (TTM62120) which is located at Ave I-8 and 35th Street to 40th Street West.

 

15) 0.7 mile Northeast of existed 120 single family house project (TR060905) which is located at Ave I-4 and 32nd to 35th Street West.

 

16) 0.8 miles Northwest of finished 84 single family house project (TTM060241) which is located at Ave I-4 and 30th Street to 32nd Street West.

 

17) 1.0 miles Northwest of completed 158 single family house project (TR54202) which is located at Ave I-8 and 30th to 32nd Street West.

 

18) 1 mile Northwest of Lancaster High School which is located at Ave I-8 and 35th Street West.

 

19) 0.3 miles East of new elemental school which is located at Ave H-8 and 41st Street West.

 

20) 0.6 mile Northwest of approved 102 single family house project (TTM062794) which is located at Ave I-2 and 31st to 35th Street West.

 

21) 0.5 miles Southwest from approved 296 single family house project (TTM 064899) at Ave I to Ave H-4 X 30th to 32nd Street West.

 

22) 0.7 miles Northeast of City of Lancaster approved 88 single family lots development projects (TTM062579) at Ave I-4 to Ave I-6 X 37th to 40th Street West.

 

23) 1 miles Northeast of approved 195 units multi-family condos project (CUP 08-04). Multi-family is allowed to build up to 3 to 5 floors high-density residential development. Usually every city, multi-family is most expensive land as you see Los Angeles, Orange County and San Diego multi-family land listings.

 

24) 0.5 miles North of approved 35 single family project (TTM061966) at Ave H to Ave I to Ave I-4 X 37th to 38th Street West.

 

25) 2.8 miles Northeast of 650 lots approved house project (TTM062757, Ave J to J-8 X 65th ~ 70th Street West).

 

26) 2.5 mile Northeast of 1594 lots Approved Master Plan Community House Project and sitting at 483 Acres land with 1 school site and 1 park site (VTTM 53229, Ave J to Ave L X 62nd ~ 70th Street West)

 

27) 5.2 mile East of 1925 lots 640 Acres Approved Master Plan Community Del Sur Project with commercial development, golf course and 3 proposed school sites and 1 proposed park site with 21 acres manned made lake inside (VTTM66241, CUP05-16, Ave G to H-8 X 92nd to 105th Street West)

 

28) 0.6 mile North, Southeast from two elemental schools. Last year City of Lancaster has approved several more elemental, middle and high schools projects.

 

29) 2.5 miles Northwest of Antelope Valley College which currently has 10,000 students.

 

30) 1.0 miles west of Lancaster Baseball Stadium.

 

31) 0.5 miles Northwest of “Pete” Knight Veterans Homes.

 

32) Electricity, Paved already exist on Avenue H and Avenue I. Ave H City of Lancaster has spent $9M to improve and Ave I last year city has spent $12M to do infrastructure improvement. Ave H and Ave I have installed electrical, phone line and water line and also being paved, which city spend most cost million dollars to install these utilities and they added a lot of value to land.

 

33) Avenue H and Avenue I are major regional arterial roads in City of Lancaster which is designed as 120 feet wide on each side with three lanes.

 

34) City has built infrastructure system such as Sewer system being installed at Avenues I which is always up to 90th street West. Sewer system is most expensive infrastructure city put into.

 

35) 1.4 miles West of Highway 14 which is now major 8 lanes highway from North to South and connects to Interstate Freeway I-5.

 

36) 5.5 miles South of Freeway 138 (Avenue D). Freeway 138 is an existing 2 lanes highway. Metropolitan Transit Authority has approved project to expand Freeway 138 to 4 ~ 6 lanes Expressway which connects the Golden State FWY I-5 to the Antelope Valley FWY 14, both major Freeways.

 

37) Freeway 138 is strategically very important as part of the national project called E220 Corridor. It provides the vital link between the two major freeways, Freeway 14 and Interstate 5 and the shortest route between the fastest economic region of Lancaster & Palmdale and northern California, States of Oregon and Washington.

 

Nearby there are numerous commercial developments......

 

City of Lancaster has spent almost $1B to complete four big hospitals within a year to accommodate fast growing city and its population, which combine with the existed medical facilities to build strong medical system.

 

1/4 mile to 3 miles from parcel, it is being surrounded by numerous existed and approved residential housing and commercial development projects. See listed all 108 approved projects from City of Lancaster Tentative Tract Map near this parcel.

 

[cobafdek]

Looks like your parcel might have better prospects than what mine has turned out to have so far.  For one thing, there's an In-and-Out Burger about a mile east!

 

My parents retired and moved to Southern California about 25 years ago.  On one of my annual Christmas visits, they took me out to the Antelope Valley (Palmdale/Lancaster) and asked "Wanna buy some land?"  I said, "Sure, why not?"  They, and other friends from Ohio who moved out here bought small 3-20 acre parcels scattered nearby.  Fortunately, none of these purchases were a major portion of their retirement funds.  They said, "You never know with land.  Someday, maybe . . . .  Just hang on to it."

 

I bought about 2.5 acres for about $12,000.  The real estate agent touted the nearby country club and small airport, and coming development.  I nodded, "Uh, huh.  I see . . ."

 

https://maps.google.com/maps?biw=1280&bih=932&q=crystalaire+ca&bav=on.2,or.r_qf.&bvm=bv.82001339,d.eXY&um=1&ie=UTF-8&sa=X&ei=5kmcVK2RNImrgwTEnYOIAg&ved=0CAYQ_AUoAQ&output=classic&dg=brw

 

Twenty years on, these have been the economic benefits:

 

1. $386 annual property tax bill, on current assessed value of $24,000.

 

2. Annual weed abatement notices ("The Board of Supervisors of the County of Los Angeles passes or will pass a resolution declaring noxious or dangerous vegetation or rubbish and refuse were growing or occurring upon or in front of property on certain streets in said city or unincorporated area . . . and that they constitute a public nuisance which must be abated by the removal of said noxious or dangerous vegetation, rubbish, and refuse.")  I've received these for years, but so far nothing has happened.  Maybe after I post this.

 

3. In 2008, my dad received a notice from the Code Enforcement Officer of the city of Lancaster.  Couches, mattresses, foam, plastic toys were dumped on his property.  I wrote a check for $500 made out to 1-800-GOTJUNK.

 

Future prospects?  I don't have a clue.  Every year, I get 2 or 3 solicitations from no-name RE brokers looking to buy out land for cash.  And there are occasional stories in the LA Times about energy companies paying a lot to buy land on which to place solar panel farms.  That was several years ago.  Your's being closer to the city has better prospects, but of course at a steeper price/acre than mine.

 

At the time, I was reading a lot of Martin Whitman's letters, and Third Avenue bought the 270,000 acres of Tejon Ranch (nearby up the Grapevine) owned by Times Mirror (former owners of the LA Times).  I've owned TRC and JOE for about 15 years now.  Ten years ago, driving on the Interstate 5, it was nice to see the huge IKEA distribution center at the Tejon Industrial Complex, as well as that nice truck stop with amenities.  But it took another 10 years for the great outlet mall which just opened.  Who knows when the Tejon Mountain Resort and their planned community Centenniel will take fruition.  Being a passive investor with top-notch RE development companies holding land at understated NAV has turned out to be tough slogging, and it is reasonable to call them land traps thus far. 

 

 

[thepupil]

I don't own it but I think CTO probably makes the most sense in terms of the land bank stocks. There was an uber bullish VIC article on it that I thought was a bit aggressive but the company is seeing real development on its properties and the newish management has done a great job so far (David winters was right to be activist there. Lots of seeking aloha articles out there too for those interested.

 

[benchmark]

Looks like your parcel might have better prospects than what mine has turned out to have so far.  For one thing, there's an In-and-Out Burger about a mile east!

 

My parents retired and moved to Southern California about 25 years ago.  On one of my annual Christmas visits, they took me out to the Antelope Valley (Palmdale/Lancaster) and asked "Wanna buy some land?"  I said, "Sure, why not?"  They, and other friends from Ohio who moved out here bought small 3-20 acre parcels scattered nearby.  Fortunately, none of these purchases were a major portion of their retirement funds.  They said, "You never know with land.  Someday, maybe . . . .  Just hang on to it."

 

I bought about 2.5 acres for about $12,000.  The real estate agent touted the nearby country club and small airport, and coming development.  I nodded, "Uh, huh.  I see . . ."

 

https://maps.google.com/maps?biw=1280&bih=932&q=crystalaire+ca&bav=on.2,or.r_qf.&bvm=bv.82001339,d.eXY&um=1&ie=UTF-8&sa=X&ei=5kmcVK2RNImrgwTEnYOIAg&ved=0CAYQ_AUoAQ&output=classic&dg=brw

 

Twenty years on, these have been the economic benefits:

 

1. $386 annual property tax bill, on current assessed value of $24,000.

 

2. Annual weed abatement notices ("The Board of Supervisors of the County of Los Angeles passes or will pass a resolution declaring noxious or dangerous vegetation or rubbish and refuse were growing or occurring upon or in front of property on certain streets in said city or unincorporated area . . . and that they constitute a public nuisance which must be abated by the removal of said noxious or dangerous vegetation, rubbish, and refuse.")  I've received these for years, but so far nothing has happened.  Maybe after I post this.

 

3. In 2008, my dad received a notice from the Code Enforcement Officer of the city of Lancaster.  Couches, mattresses, foam, plastic toys were dumped on his property.  I wrote a check for $500 made out to 1-800-GOTJUNK.

 

Future prospects?  I don't have a clue.  Every year, I get 2 or 3 solicitations from no-name RE brokers looking to buy out land for cash.  And there are occasional stories in the LA Times about energy companies paying a lot to buy land on which to place solar panel farms.  That was several years ago.  Your's being closer to the city has better prospects, but of course at a steeper price/acre than mine.

 

At the time, I was reading a lot of Martin Whitman's letters, and Third Avenue bought the 270,000 acres of Tejon Ranch (nearby up the Grapevine) owned by Times Mirror (former owners of the LA Times).  I've owned TRC and JOE for about 15 years now.  Ten years ago, driving on the Interstate 5, it was nice to see the huge IKEA distribution center at the Tejon Industrial Complex, as well as that nice truck stop with amenities.  But it took another 10 years for the great outlet mall which just opened.  Who knows when the Tejon Mountain Resort and their planned community Centenniel will take fruition.  Being a passive investor with top-notch RE development companies holding land at understated NAV has turned out to be tough slogging, and it is reasonable to call them land traps thus far.

 

My initial reaction is that the deal seems like a 'buy-and-hope' -- hope something happen that someone will pay a premium for the land. Does the mixed-use zoning make it more or less attractive?

 

Another wrinkle to this is that this is part of an LLC that will buy the entire land, I was pitched to buy a share of the LLC, which makes it even more complicated.

[cobafdek]

Does the mixed-use zoning make it more or less attractive?

 

I think this would depend on the price, and whether the current quoted price/sq.ft correctly prices that parcel in that particular market.  The LLC prospectus might have some DCF projections upon which the $2.50/sq.ft is based, so you might want to take their base rate but double (or even triple) the time horizon (figure 20-30 years instead of 10), weigh the relative likelihoods of the longer time horizons, and whether you could accept these lower adjusted returns.  That's my 1-cents worth of speculative advice.

 

P.S.  Being an LLC, there's also the illiquidity to consider, plus on-going expenses allocated to the investors.  And you might get one of those dreaded K-1 tax forms every year to file with your 1040.

 

P.P.S  The broker or representative who pitched you this LLC might have access to the limited market of 7 to 10-year old RE LLCs or non-traded public REITS whose charter investors have since taken a bath to the tune of 50% or more off the NAV.  Ask if one of these are available.

 

 

[benchmark]

Does the mixed-use zoning make it more or less attractive?

 

I think this would depend on the price, and whether the current quoted price/sq.ft correctly prices that parcel in that particular market.  The LLC prospectus might have some DCF projections upon which the $2.50/sq.ft is based, so you might want to take their base rate but double (or even triple) the time horizon (figure 20-30 years instead of 10), weigh the relative likelihoods of the longer time horizons, and whether you could accept these lower adjusted returns.  That's my 1-cents worth of speculative advice.

 

P.S.  Being an LLC, there's also the illiquidity to consider, plus on-going expenses allocated to the investors.  And you might get one of those dreaded K-1 tax forms every year to file with your 1040.

 

P.P.S  The broker or representative who pitched you this LLC might have access to the limited market of 7 to 10-year old RE LLCs or non-traded public REITS whose charter investors have since taken a bath to the tune of 50% or more off the NAV.  Ask if one of these are available.

 

There are a couple of things that gives me pause:

a) If the price appreciation only happens after 30 years, then the return isn't that great; plus if this is such a great deal, why isn't the seller leverage up and get it?

 

b) LLC structure isn't well defined, and I don't like uncertainty.

[Picasso]

Wouldn't surprise me if I knew the person on the other side of this transaction.  I was pitched a similar location in which the seller has been holding for something like 20-30 years.  The husband had the bright idea of buying the property but recently passed and the wife was sick of holding onto it. 

 

I know the area well.  I used to walk up and down those streets from a local community college in my high school days to get to In-N-Out.  It was a long walk but worth it.  My dad used to drive 100+ on the 14 freeway and get off on Ave H or I to get away from the cops and hide in the fields or under bridges.  On Avenue I a couple miles down I had a couple of my dear dogs put to sleep at the shelter.

 

The area is now predominantly black whereas it used to be mostly aerospace hard working blue collar types.  Not to sound racist or anything, but that area has turned into a sh*thole.  I always get pitched different parcels of land around those parts, or better yet on the I-15 near Barstow, as if the north end of Lancaster wasn't enough of a long shot.  I swear, northern LA county land has the most annoying bag holders with the best stories.  Future bullet trains, freeways, international airports, new aerospace, etc etc.  They even started up with the whole, buy this land because some rich guy or gal in China can buy it from you to create jobs under some section of the law to get citizenship. 

 

Glenn Gary has nothing on what I've heard from those bagholders.

[benchmark]

Wouldn't surprise me if I knew the person on the other side of this transaction.  I was pitched a similar location in which the seller has been holding for something like 20-30 years.  The husband had the bright idea of buying the property but recently passed and the wife was sick of holding onto it. 

 

I know the area well.  I used to walk up and down those streets from a local community college in my high school days to get to In-N-Out.  It was a long walk but worth it.  My dad used to drive 100+ on the 14 freeway and get off on Ave H or I to get away from the cops and hide in the fields or under bridges.  On Avenue I a couple miles down I had a couple of my dear dogs put to sleep at the shelter.

 

The area is now predominantly black whereas it used to be mostly aerospace hard working blue collar types.  Not to sound racist or anything, but that area has turned into a sh*thole.  I always get pitched different parcels of land around those parts, or better yet on the I-15 near Barstow, as if the north end of Lancaster wasn't enough of a long shot.  I swear, northern LA county land has the most annoying bag holders with the best stories.  Future bullet trains, freeways, international airports, new aerospace, etc etc.  They even started up with the whole, buy this land because some rich guy or gal in China can buy it from you to create jobs under some section of the law to get citizenship. 

 

Glenn Gary has nothing on what I've heard from those bagholders.

 

Thanks Picasso, this is great info, and that's what I was afraid of.

 

In general, how does one approach land investment? or is it just a too hard pile (i.e., not in my circle of competence)?