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Case Study:

Dirt Value

A recent article from the Austin Business Journal about a 1900s house being moved in order to make way for a high rise called "SkyLoft" caught my attention.

Most times, a property labeled "historic" means the existing improvements must stay in their original location. However, by granting the approval to move the older structures, it clears land in a valuable location. It got me thinking: How much is this land potentially worth?

Approvals, also called "entitlements," are needed for a proposed project like this and these take time and cost money. The submittals rely upon the zoning and the city's attitude towards development. This is what the SkyLoft will look like. This rendering is by architect Mark Hart.

One way to get to dirt value

Value of project once completed
Less: Cost to build (all costs)
Dirt value (what to pay)

Scenario 1 - Existing Structure Stays

The property has about 3,000 square feet (sf) of building. Given the location and using a few published stats, I came up with a ballpark range of $2,000,000 just by applying a $/sf to the approximate building size:

3,000 sf x $600 = $1,800,000
3,000 sf x $900 = $2,700,000

Scenario 2 - Existing Structure Gets Moved

After entitlements are secured, a significant amount of uncertainty is gone. The buyer of an entitled project can now focus on getting the project built and they're more comfortable running the numbers.

Let's try to do just that. For ease, let's use 100 units and round the lot to 10,000 square feet. If each apartment were to have 1,000 square feet, then the building would be 100,000 sf total. Easy for this example. Assuming the value of the project once complete at $500/sf and a ballpark construction cost of $300/sf we can get to a rough estimate of the land's value.

$50,000,000 (100,000 x $500)
$30,000,000 (100,000 x $300)
$20,000,000 Dirt Value

That is a 10x difference if we use $2,000,000 for IF it stays historic versus $20,000,000 for the land entitled for 100 units. What would happen if it were entitled for 200 units? Then the value upon completion should increase but so should the costs. Doubling the number of units doesn't just double the land value.

Take aways:

  1. The same land size can be valued differently depending on what can get built.
  2. Entitled projects have permission to do "x" and that can add value to the land.

When it comes to zoning matters, the existing structures don't get zoned, the land does.

This article was posted originally on LinkedIn.