A six year land banking loss beside an interchange that never got funded, worth studying

A useful case study on land banking risk. Take 3.5 acres of scrub purchased for $28,000 cash about a mile from where a new highway interchange was supposedly planned, based on a broker showing the county's long range transportation plan with the interchange drawn on it. The mistake sits at the very first step. A long range plan in most counties is a 25 year horizon document listing projects with no funding attached. A separate short range program, typically four years, lists projects with actual funding sources named. In a case like this, the interchange was never in the funded document, not delayed, simply never listed. Nobody misrepresented anything. The document itself was the wrong one to be reading, and nobody asked which document was in front of them. Six years of carry on a parcel producing nothing tends to add up in ways that are easy to underestimate. Property taxes might start around $310 and finish near $890, since the parcel never qualified for an agricultural classification (it was scrub with no agricultural use, and that classification has to be applied for based on actual use), totaling roughly $3,600. A weed abatement citation might run $200 plus $350 to clear. A road improvement special assessment when the county eventually paves the frontage road could add $1,400 spread over three years, ironically the only infrastructure that ever actually arrives. If the parcel eventually sells for $26,500 with a 6 percent commission, net proceeds land near $24,910. Against $28,000 in and roughly $5,550 of carry, that is a loss of about $8,600 over six years, with the original capital earning nothing the entire time. The lessons generalize well. Ask for the short range, funded program specifically, and treat any project with no identified funding source as effectively not existing. Check whether a parcel can qualify for a reduced tax classification before buying, and price the full undiscounted tax bill if it cannot, since those classification rules vary by state and the assessor's office, not the broker, is the right source. And model carry over a decade or more rather than five years, since five is often just a number that sounds long enough.

renee_dubois PS1APRO 12

Answer

sonia_alvarez CB4APRO 17

The two document point is the most useful part of this post and it is worth putting plainer for anyone reading. Transportation planning at the regional level generally has a long range plan covering twenty or more years, which is a list of projects the region would like, and a short range program covering roughly four years, which is the list with money identified. Names and lengths vary by state and by the regional planning organization, so ask what each document is called locally. The test is whether a funding source and a fiscal year are named next to the project. If they are not, the project is a drawing. The special assessment is the other thing worth pulling out. When a county or a district builds an improvement that benefits specific parcels, it can often charge those parcels directly, and raw land with frontage gets charged the same as improved land does. Whether that is allowed and how it is calculated depend on state law and the local ordinance, and so does the protest process. You had no income and a bill arrived anyway. That is the carrying cost people leave out of their model, because taxes are predictable and assessments are not. I would disagree with you on one point. You describe the cause as reading the wrong document, and that was the trigger. The reason a $28,000 mistake became an $8,600 loss is that the carry ran at a rate you had not priced and you had no classification relief. If the interchange had been real but ten years late, you would have been in the same squeeze with a better story. Price the carry first, then form an opinion about growth.

sonia_alvarez CB4APRO 17

3 replies

Rena Expert

Adding the mechanism behind @sonia_alvarez's last point, because it generalizes.

Land banking has no internal source of funds. Every dollar of property tax, nuisance compliance, special assessment, and insurance if carried comes from outside the asset for the entire hold. That means the hold length and the carry rate multiply together into the real cost basis, and both are uncertain. @renee_dubois's parcel carried at roughly $925 a year against a $28,000 basis, about 3.3% a year, so six years added close to 20% to what the land had to appreciate before breaking even. At a $310 tax bill it would have been closer to 7% over the same period. The classification question is worth as much as the growth question over a long hold.

On the growth side, the underlying thesis for land banking rests on development and population actually reaching the parcel. National housing shortage and movement toward less dense areas support the direction in aggregate. Neither supports any particular parcel, and the timing and direction of growth at a specific location remain genuinely uncertain. A funded capital program is evidence. An unfunded long range plan is not evidence of timing at all.

Two things to confirm in writing before buying raw land for a long hold, both of which vary by state and often by county: the current property tax classification of the parcel and what use is required to obtain or keep any reduced classification, from the assessor, and whether any improvement district, road district, or assessment district covers or is proposed to cover the parcel, from the county. Then write the carry out to a hold length longer than you expect, because the constraint that ends most land banks is the owner running out of patience or cash before growth arrives.

Rena Expert

ehernandez74 PC3BPRO 12

That same shape shows up in other counties every year. A broker brings a printed map with a proposed arterial extension drawn on it, the buyer asks what stage it is at, and the answer is that it is in the plan. The question that saves people is which plan. It usually turns out to be a corridor study, which means somebody was paid to draw options and nothing more. The part of your post worth carrying forward is the twelve years instead of five. Five year models feel patient and they are not, on land that depends on unfunded infrastructure. Sorry about the eight and a half thousand.

ehernandez74 PC3BPRO 12

Reply Anonymous