The land market in New York City is presently on fire, and we are seeing land prices increasing on, seemingly, a monthly basis. This has been going on all year, and as a result, we have seen many sellers of development sites selling for far less than their properties are worth, leaving tens of millions of dollars on the table. The victims here are not just non-real estate professionals who happened to find themselves in the ownership position of a site, but some real estate veterans who acted without taking the time to consider how they could maximize their sales prices.
For those of you considering selling a development site, here are five easy steps to making millions more on your sale.
1. Investigate possession issues: When selling a site, tenant issues are potentially significant encumbrances on a seller’s ability to maximize the sales price. If a property is vacant and free of tenancies, there are no issues here. However, if there are tenants, all leases need to be read carefully to determine the nature of termination clauses or buyout provisions, if any. To the extent that there are no as-of-right options to terminate tenancies or negotiations to buy out or relocate, tenancy should occur prior to placing the site on the market. Knowing where you stand relative to “possession” is a key to maximizing value.
2. Have a zoning study prepared: The main purpose of this undertaking is that the seller should know exactly what can and cannot be done with the site. The New York City zoning resolution is thousands of pages of often confusing rules and regulations. Even the most proficient zoning experts need time to investigate any site in a particular zoning district to determine exactly what can be built on a parcel of land. Even different parcels within the same zoning district can have varying potential based upon a number of different factors like frontage, depth and whether the site is midblock or on a corner. There also may be different bonuses available to a particular site, which could increase the building square footage of the site. Often these bonuses are dependent upon the site’s location. Having this zoning study prepared will also allow an architect to conceptualize a typical floor plan to give a buyer an idea of how hotel rooms, residential apartments or office spaces can be laid out. Certainly, the seller is not going to make any representations about what can be constructed on the site, but having this intelligence will expedite the process undertaken by interested purchasers and will also make sure that the seller is completely aware of the potential the site has.
3. Have an environmental report prepared: Overwhelmingly, buyers of development sites want to know that the site they are buying is not encumbered with a potentially adverse environmental condition. In New York City, it is very rare for a buyer to get a seller to agree to a post-contract-execution due-diligence period. Therefore, a buyer must perform all of their due diligence prior to signing the contract. Some buyers who are not familiar with standard operating procedures in New York balk at spending the money on an environmental report prior to having a commitment from the seller. Having the report done up front allows the seller to understand exactly what they are selling (in addition to providing an opportunity to address the adverse condition, if any) and gives the buyer the opportunity to move quickly with their independent report. Once again, a seller is not going to make a representation about the environmental condition, but the buyer can simply have the company that did the report for the seller issue an updated report for the buyer directly, which can be done quickly and less expensively than a new report from scratch.
4. Look for expansion possibilities: The first thing we do when we are retained to sell a development site is to investigate whether any neighbors want to sell their properties or, if not, if they will be willing to sell their transferable development rights. This could increase the value of all parcels as a more substantial site can be assembled. Some of the sites I have assembled have taken many years to put together and have consisted of as many as 14 separate transactions to complete the assemblages.
5. Put the property on the open market: It continues to amaze me that the largest 25 sales brokerage companies have only handled about half of the thousands of transactions that have closed over the past 12 years. Retaining a broker to exclusively market the site will ensure the property is sold at the highest price. Today, I am telling potential sellers that there is a 50 percent chance the buyer of their site is likely to be a buyer they have never heard of or wouldn’t have put that buyer in the top 250 prospects for a particular site. We often see first-time buyers coming into the market to pay prices well in excess of what the most prominent developers in the city are willing to pay.
We continue to see owners sell sites to the “obvious” buyer for millions less than they could have gotten. I always tell sellers that there is no law that says you have to sell the property for the highest price, but why wouldn’t you? Follow the steps above, and those extra millions could be yours.