Using Open Space To Increase Land Development Values
By Nancy Chadwick
Picture two vacant land parcels, next to each other in the same municipality, that have the same zoning (single-family housing). New homes on their lots generally sell for $450,000 in this area. Lots in this district (call it "R-1 District") are required to be at least 40,000 square feet in size and 200 feet wide at the building line. Parcel A consists of 31 acres and has been subdivided into 25 lots, each lot satisfying the size and width requirements of the zoning. Parcel B consists of 25 acres and has been subdivided into 25 lots, but each lot is 25,000 square feet and 100 feet wide at the building line. The Parcel B lots also comply with the zoning requirements. How is that possible?
Parcel B has been subdivided according to a cluster development overlay available in the R-1 District. This allows lots to be smaller (25,000 instead of 40,000 square feet) and more narrow (100 feet instead of 200 feet) at the building line. The catch, however, is that there must be open space of at least 20% of the net land area ("net" meaning the land left over after deducting areas for existing and proposed streets) and the overall density cannot exceed one dwelling unit per gross acre. Here are the calculations:
Parcel A (31 gross acres):
31 x 43,560 sq. ft. = 1,350,360 gross sq. ft.
less 25% "wastage" = 1,012,770 sq. ft. net (75% x gross square feet)
divided by 40,000 sq. ft. = 25 lots
Parcel B (25 gross acres):
25 x 43,560 sq. ft. = 1,089,000 gross sq. ft.
less 25% "wastage" = 816,750 sq. ft. net (75% x gross square feet)
less 20% open space = 653,400 sq. ft. (80% x net square feet)
divided by 25,000 sq. ft. = 26 lots (maximum allowable is 25)
Do you think both of these parcels have the same value as land developments because they produce the same number of lots? You might be surprised to learn that Parcel B is worth substantially more than Parcel A. The reason for this is that the horizontal improvement costs for Parcel B (e.g., streets, curbing, sidewalks, utility lines) will probably be much less than for Parcel A because the lots have been clustered (i.e., laid out in a "tighter" area) and have more narrow frontages on the proposed street. This means a shorter length of roadway will have to be constructed which also results in a corresponding decrease in curbing, sidewalk and other related improvements.
When you apply the principle that the value of land for development is tied directly to income and expense, you can understand why builders might roughly estimate the per-lot values of Parcels A and B, respectively, at $56,500 and $81,500. The calculations would look like this:
Value of Parcel A
finished lot value (lot with its share of horizontal improvements) = $112,500
less improvement costs (assume those total $56,000) = raw lot value of $56,500
$56,500/lot x 25 lots = $1,412,500 total land value
Value of Parcel B
finished lot value (lot with its share of horizontal improvements) = $112,500
less improvement costs (assume those total $31,000) = raw lot value of $81,500
$81,500/lot x 25 lots = $2,037,500 total land value
These projected values assume that the builders wouldn't have to close on the parcel until the subdivision was approved and all of the other development contingencies had been satisfied (see the Land Development Values article subtitled "Buying As Is v. Contingent" for a discussion of typical contingencies). The purchase price in the builders' offers would probably be stated as X dollars per approved lot.
Clustering benefits both parties in the development process. Municipalities that permit clustering options may realize an increase in permanent green space as residential parcels are developed over time. Builders, on the other hand, can reduce some of their costs without sacrificing the quality of the communities they produce. In addition, sometimes clustering overlays permit a slight increase in density. Although this might result in the builder getting only 1 or 2 additional lots, this increase in the site yield might help to further reduce the overall improvement cost for the project. Clustering is not the only way in which open space can be used to increase land development values. Stay tuned for additional articles.
At last, there is a resource for people interested in buying or selling land. Check out Nancy Chadwick's real estate investing and land development guides, articles and books at http://www.LandBuyingandSelling.com/
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