“What’s past is prologue.”
– William Shakespeare, The Tempest
A sequential enterprise will often have many phases and stages throughout its life cycle prior to achieving its stated aims. Each of these phases are important because without successfully completing each the project would either suffer a diminution of value or productivity or fail altogether. When working in a sequential system the order in which tasks are performed and completed is very important. Often, a subsequent phase or task cannot begin or proceed without the successful completion of a prior phase or task. In effect, those initial tasks and phases must be accorded a certain primacy in the endeavor since the latter portions of the development likely could not proceed without their successful prior completion.
Large-scale energy, infrastructure, mining, and residential and commercial real estate development projects are examples of multi-phase projects which are sequential in nature. They can take years to complete and can be subdivided into smaller, identifiable tasks and phases. Most run a fairly standard development cycle including the conception and planning stage, initial budgeting and financing stage, site access and land acquisition stage, development, design, and construction stage, followed by the final and ongoing operational stage. If the position equals primacy argument described above has merit, then the initial planning stage is the most important to the project. In many ways this is correct as faulty assumptions here or a general lack of adequate planning will have continual and potentially severe consequences throughout the remainder of the project. If severe enough they can even terminate what otherwise would have been a successful and profitable project. Of only slightly less importance is the budgeting and financing stage of the project. Sadly, the world does not run on either love or Dunkin’, it runs on money. If you get the money wrong, it is likely that the project will suffer. If you get the money wrong, it is possible that the project will not survive its initial stages of development. If you get the money wrong and by some miracle the project survives through to completion the economics of the resulting project will likely be negatively affected causing costs to either exceed budgeted parameters or fail to generate the expected return. Neither eventuality ingratiates you to executive management, partners, or investors.
But what about the next sequential phase in the project? What about the site access and land acquisition phase of the project? While seemingly less essential to the project than the earlier planning and budgeting phases of the project, it is still the first step where the project leaves the theoretical realm and enters the real world. After all, without a suitable tract of land on which to site the project none of the subsequent development plans can be implemented. So, if this is true then why does it often get less focus or concern than the following development and operational phases? Why do I routinely hear sentiments such as:
“We have a lot of work to do on this project, I can’t blow my budget on the land pick up.”
“We need to keep costs to a minimum here – that is the key driver.”
“We need to get through this phase so we can start the project.”
To some extent I understand where the project developers are coming from. If you are an oil company, you drill wells and sell crude oil and natural gas into the market. If you are a renewable developer, you erect solar arrays or wind turbines and sell electricity into the grid. If you are a hard mineral miner, you explore for and extract precious or commercially needed minerals from underneath the surface of the earth. In fact, none of the companies I work with ever purchase land merely for the sake of owning the land. The land serves a purpose, with that purpose being the site of the eventual operations contemplated by that particular client.
Most developers, no matter how intelligent or dedicated they are, do not understand how to properly value the land to be acquired. And as with anything in life that you do not or cannot properly assign a value to, it is highly likely that you will instead discount or ignore the actual importance of that value. As a result, the land acquisition process, even while near the front of the development timeline, typically receives less attention and funding than its position in line would seem to demand. Combine this with land, and in particular unique tracts not a part of a subdivision or block and lot program, being difficult to accurately value and you have a scenario seemingly designed to frustrate developers and investors seeking to initiate and manage a land acquisition project.
So how does the developer, or the executive, or the investor bring competence and clarity to an acquisition program? The first and best advice would be to develop an appreciation for the valuation process in all of its complexity and variability. Second, it is imperative to understand that value, like beauty, can to some rational extent be judged in the eye of the beholder.
Everything has a value, and land is no different, but determining what that value is can be the source of much frustration and turmoil. Partly this is because unique tracts of land do not get sold with the same frequency as would a box of roofing nails or an oil change for the family car. When a good or a service is transacted frequently it becomes easy to establish fair market value for that good or service. Conversely, one need only look at one of the more esoteric listings on any online marketplace to see the difficulty sellers and buyers encounter when trying to value and then sell a unique or bespoke item. Value is most easily and readily determined when the object or service at issue is identical to others routinely sold in a market. In such instances, if the seller correctly identifies the value placed on their good or service to be placed up for sale and prices it accordingly, the transaction is usually both rapid and successful. This logic can also be applied to tracts of land in a housing subdivision owing to their similarity with each other.
Much of the learning curve offered by the standard valuation process comes from insights gleaned when similar products or tracts are repeatedly transacted on the market. When the good, service, or tract of land is similar any aberrant outcomes or other minor variations between transactions really do not matter all that much. They become statistical outliers held apart from the greater mass of other conforming transactional data and can to some degree be discounted.
But what about when the good, service, or tract of land is so far removed from similar examples that it would be considered unique? Suddenly assigning a fair value becomes much more difficult. Now you are relying on similar tracts and hoping that the particulars and outcomes of their transactions will be reasonably comparable to the subject tract in your transaction. But as you start to apply words like “reasonably” and “comparable” the valuation process becomes a subjective analysis removed from what was once an objective, data-driven process.
The further you move away from an impartial and objective valuation analysis the more likely it is that the several parties to the proposed transaction will not be able to agree on a single valuation for the tract of land. The “market” (itself a somewhat abstract concept) may view the value of a unique tract of land one way, the developer and potential acquirer will view its value another way, and the current landowner will also likely have their own perceived notion as to their tract’s value. If each of these three viewpoints apply a subjective valuation analysis there will be very little likelihood of a successful outcome to the proposed transaction.
So how does one seeking to acquire a “unique” tract of land succeed when confronted with this scenario? What strategies or techniques can be utilized to help ensure that a mutually agreeable valuation is accepted by each party? I would offer the following thoughts:
See the Valuation Process Through the Eyes of All Parties
As stated previously, the market, the acquirer, and the current landowner will each likely have a different perspective when it comes to the subject tract’s value. The acquirer should begin the valuation process with the understanding that each of these viewpoints are valid in their own right.
The “market,” whether it be the county in which the tract lies, the local town, or even something more hyper-localized such as a particular valley will have an expected value for that tract of land. The market, it should be noted, will also be valuing the tract with the expectation that it will continue to be utilized as it currently has been utilized, as pastureland, cropland, etc. When a business is seeking to purchase the land and then remove it from agricultural use it becomes more problematic and difficult to rely on a simple market valuation. In essence, one farmer may be willing to sell the tract for market value to another farmer all day long, but the price will go up when a business from outside their community wishes to purchase that tract of land and use it for their own purposes. Is that “fair?” Perhaps not, but that is reality. And since the vast majority of projects do not enjoy the legal right to condemn a tract and take it under the provisions of the 5th Amendment the landowner is under no obligation to sell to you.
The current landowner will have their own perceived valuation for their tract of land. They know what the basic market value is. All rural landowners know the basic value of land. It is their primary economic reserve as well as being the site of their operations. The same way that you can stop a broker on Wall Street and ask them what the Dow Jones or Nasdaq is valued at that day, a farmer or rancher can tell you what a tract of land is worth. Their response will differ when discussing a theoretical tract of land versus their own tract of land. For a theoretical or third-party tract of land they will likely quote you something near to the market value of that tract, but for a tract they own they will instead look more toward the current operational value of that tract of land. Operational value differs from market value in that it considers any improvements made to that tract of land by the current owner as well as its value not just to the owner’s real estate portfolio but to their current and ongoing operations as well.
Finally, the developer will bring a unique and separate valuation to the equation. Before approaching any acquisition, the potential acquirer must understand their own project economics to such an extent that they have derived some understanding as to what value this tract of land will bring to their project. This value, based primarily on the developer’s project economics, will be somewhat removed from the value calculations applied by either the market in general or the current owner in particular. The essential question here is what is the tract worth to the project?
My suggestion to the potential acquirer is to see the valuation process from all points of view but to focus primarily on this third valuation method. Some entities spend far too much time concerned with not overpaying what the market would offer, but forget that they are not themselves part of that market. They should instead focus on what value that tract of land has to them and their potential operations, remembering that until they secure a physical site for their intended project, they have nothing but a theory on a whiteboard.
Understand That There Are Off Ramps If Needed
Most developers maintain a narrow focus when acquiring a suitable tract of land on which to construct and operate their project. They recognize the tract of land as a necessary evil in that process but typically do not wish to assign any resources to that effort beyond the bare minimum required. Many developers are equally or sometimes more concerned with not getting stuck with a tract of land should their project prematurely end then they are with acquiring a suitable tract of land for that project. Many land developers have told me some version of “we are not in the real estate business and do not want to own or hold any unusable acreage.” This sentiment is further compounded by the realization that they are normally paying above market values for this acreage as a third party coming into a community as an outsider. There is a concern that they will be stuck with a tract of land that they will have no use for.
When confronted with this line of argument I usually counter with the fact that so long as they are paying a reasonable price for a tract of land which has an inherent store of value in it, then they will not likely be saddled with it with no future recourse. So long as they are not buying swampland, land in a floodplain, land in danger of subsidence, or land which suffers other terminal defects which would make it unusable to any other end user, then the acquirer has the ability to turn around and resell the land at some point in the future recouping either some or all of the investment they made in that land. Many companies are loathe to consider this eventuality but when faced with the realization that there are greater dangers in not acquiring suitable acreage for their project they should reconsider this point of view. To be clear I do not advise that a project developer wantonly acquire a tract of land at several multiples of its current market or operational value, but I do counsel clients to look at the long-term picture when determining the risk versus reward calculation that goes into securing a tract of land. When such a long-term point of view is applied to valuing the tract of land it usually becomes evident that so long as the initial purchase price is somewhat reasonable land has a tremendous ability to store and retain value across many years.
Figure 1 – Average U.S. Farm Real Estate Value – 1950 to 2023
Figure 1 shows the long-term trend as to the value of rural real estate used as crop and ranchland. This chart reflects the average price of an acre of rural farm or ranch land across the United States during the period from 1950 through 2023. It should be noted that the values presented here are homogenized averages and that different regions within the United States will have far different specific values. But the general trend as depicted by the chart in Figure 1 clearly shows that with the exception of a brief period in the 1980s farm and ranch land has either retained or more likely increased in value at every point during the last 75 years. During that period, average inflation-adjusted land values have increased by over five hundred percent (500%). Between 2022 and 2023, inflation adjusted US average cropland values rose by 4.6% to $5,460 per acre compared to 1.2% per year over the previous five years (2017 to 2022), while average pastureland values rose by 3.2% to $1,760 per acre compared to 1% per year over the previous five years. Some periods were better than others, but the long-term trend clearly demonstrated by Figure 1 shows that crop and pastureland are relatively safe investments when acquired, managed, and maintained properly.
A potential acquirer should therefore be somewhat less trepidatious when deciding whether to acquire a subject tract of land for their project. So long as the parameters of the acquisition are reasonable at the time of that acquisition and fall within the acceptable limits of their project economics, then there should be more reward and less risk inherent in securing the tract of land. If all goes well, that land will serve as the site of their operations for many years into the future. If circumstances change for any number of reasons, so long as the acquisition outlay was reasonable at the outset, the developer should be able to make themselves whole by returning the tract of land to the market and reselling it. I understand the risk a developer faces in committing large sums of money to an acquisition, but when the risk to the future viability of the proposed project is weighed against this outlay of funds more developers should be choosing to acquire a suitable tract of land when available – especially with the understanding that nothing is permanent and most or all of their cost outlay can likely be recouped if necessary. This is the difference between securing an asset whose value will appreciate over time versus spending funds on either depreciating assets or internal costs such as the additional and ongoing salaries, overhead, and vendor costs required as the developer stretches out the acquisition process in search of more and potentially better tracts of land to acquire.
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