Friday, September 16, 2011

How could I find information on cap rate scenarios for raw land?

If a large amount of raw land in a prime location is going to be marketed with cap rate scenarios (resort hotel, mobile home park, storage units, campground, shopping center, business offices, etc.), how could I find information on each of these scenarios? This information would have to include a rough estimate of building costs, loan information, rents, taxes, etc. Is there any way to get this information more easily than spending countless hours on dead ends? PLEASE HELP!|||This is a huge topic that cannot be completely covered here. I am a commercial Realtor in Texas, and I deal with development and raw land deals on a regular basis. CAP rate scenarios only truly apply to existing, income-producing properties. All you can do with raw land is create a prospectus. A prospectus is basically a business plan with a bunch of variables, one of which can be a CAP rate on the investment. This is directly tied to the NOI (annual Net Operating Income), which insinuates that the development is already built.





A developer has 2 ways of making money based on a CAP rate. The first is to hold the property over a long period of time, and collect revenue (like a landlord). The second is to fill the spaces (like in a retail center) and establish cash flow, and then sell the property to an investor on a pure CAP rate calculation. These two methods are very different in planning and execution.





Over the long term, a developer will try to get around a 15% return (not truly a CAP rate here) on his initial investment. That means that if they plan to spend $10,000,000 buying the land, building the building, paying commissions, paying management fees, etc, then they should earn an income of $1,500,000 in year one (before debt service, aka the loan payments). Because there are so many risks involved, the percentage must be high.





If the developer plans to sell right after leasing all the spaces (like in a retail center), then they sell the building based entirely on the CAP rate. If the building is 90% leased and earning $1,500,000 a year (after expenses), then they could likely sell to an investment group at an 8% CAP rate, which equals $18,750,000. If it only cost them $12,000,000 to build, then they profit over 50% on the deal (although this is not a CAP rate... it is a profit margin).





Without knowing where you are, it is impossible to guess what construction costs are. Also, the different developments vary immensely in price per foot, so it is impossible to speculate.





If a real estate group is advertising a raw piece of land with a CAP rate, just ignore it... it is just bad marketing. You cannot do a CAP rate this way at all. The only way this could be done is if the site plan is already done and approved, which shows exactly what sort of buildings are to be built and what sort of zoning is allowed, and perhaps if there are already leases signed in advance. But even then, there is no way to predict exactly the costs to build, so the conversation is moot.





In other words, the only person that can predict the CAP rate of any property is the developer himself. Any rates determined by others is just a marketing ploy.





If you would provide more specific info on what you are looking for, I might be able to assist you further. It would be good to know the following:





-What part of the country/state you are in


-How big of a development you are talking of


-What use specifically are you wanting (a retail prospectus is completely different than a self-storage prospectus)


-Are you looking at this from the seller's perspective, or the buyer's?


-Will this be an in-fill project (other parcels nearby are all occupied) or a pioneer project (lots of other vacant land in the area).





That's all I have for now.

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