How much is too much to pay for land?

“How much can I afford to pay for land” is a very common question asked today by developers. Well, the answer is based on many variables.

First of all, before asking this question, you must first look at the location of the parcel.

As the old adage goes “Location, Location, Location”. Without the right location, it does not matter whether you get the land for free since you might have a difficult time finding a tenant or a buyer for your development.

With that said, now “how much can you pay for land?” Land is only worth what the current or proposed zoning dictates can be put on the parcel. A one acre parcel of land at the best corner of the Central Business District is worth a lot more than a one acre parcel of land in a remote corner of the suburbs. The zoning density is what makes the land more valuable. Typically, the land cost should be about 10 – 30% of the total development costs.

Now land cost is just not what you pay for the land. The land cost should include such items as:

  1. Zoning costs
    If the land is not zoned, then there are costs to get it zoned, such as: legal, zoning fees, public relations fees for a controversial zoning, or a payment to the adjoining neighborhood associations to fix their amenity package to gain their favor in a zoning.
  2. Costs to remove all environmental issues
    The property might need to remove contaminated dirt or to remove asbestos from a building on the property that needs to be torn down.
  3. Off site costs
    The zoning conditions for the property might require the developer pay for off sight road improvements or traffic lights.
  4. Costs to bring utilities to the site and utility fees
    In order to develop the property, the developer might need to bring the water lines to the property. In some jurisdictions there is a water line fee to pay the local water department that is based on the frontage of the property. A property with a larger frontage will cost more that a similar size property with a smaller frontage.
  5. Real estate commission
    Any real estate commission paid is part of the land cost.
  6. Costs to remove existing buildings
    If the property has any current improvements on it, there will be a cost to raze and dispose of those buildings.
  7. Costs to relocate existing tenants
    If the property has a building located on it with tenants, then there might be a cost to relocate the tenants to another location.
  8. Cost of special retention or detention ponds
    Depending on the local water authorities, the developer might need to have additional capacity on the site for water runoff.
  9. Costs of addition walls
    If the property is hilly, there will be cost for the addition of retaining walls.
  10. Reduction of density due to setbacks, wetlands, etc.
    Based on the zoning requirements and existing wetlands, the building density may be less due to required setbacks. A lower density equals higher land costs per square footage or per unit.
  11. Cost of bringing in or taking out dirt
    If dirt is required to bring in or take out, this translates into extra cost. The cost can also increase based on the drive time to move in or take out this dirt.

With all of the estimated costs estimated:

Land cost
+ Zoning costs
+ Costs to remove environmental issues
+ Off site costs
+ Cost to bring utilities to the site and utility fees
+ Real Estate commissions
+ Cost to remove existing buildings
+ Cost to relocate existing tenants
+ Cost of special retention or detention ponds
+ Cost of additional walls
+ Reduction of density due to setbacks, wetlands, etc.
+ Cost of bringing in or taking out dirt
= Gross cost of the land

With this number in hand, the Developer then needs to verify land comparables for similar type properties in the area. Adjustments on these comps will be made for location, date of sale, shape of the property.

As mentioned above, the zoning density takes a great part of what can be paid for the land. A one acre parcel where you can build 10 homes per acres is worth more than a parcel where only 5 homes are acres are allowed.

Once the density is determined by the local zoning department, the developer must then determine what actually can be built on the property. By this I mean, even though 10 homes per acre are allowed, once the setbacks are reviewed, the footprint of each house is determined and the removal of any land in a flood plain area is determined, the real density will be determined.

When all these issues are reviewed, the developer will then prepare the preliminary development proforma. By preparing this proforma, the developer is looking to determine the profitability of the deal. If the developer wants a return of 20% on his equity, and the deal only pencils out at 15%, then besides sharpening his pencil for the actual hard costs of the development, the developer must reduce the cost of the land.


Howard A.Zuckerman is the Founder of The Institute of Real Estate Development & Investment, a builder/developer located in Atlanta, GA and author of numerous real estate books. For more information, contact him at: info@iredi.net or (855) 884-7334.

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