Land pricing analysis for Buckingham Place mixed-use development

Land Pricing in the Buckingham Place Deal

Pricing

Max Price by Site Use Type, per acre:

Big Box: $19/sf/year in income ($20/sf for occupied space less the stabilized vacancy rate of 5% yields a $19/sf average)

To achieve the target cap rate, $19/total-value-per-sf must be equal to or greater than 7.75%, or: 19/.0775 = $245.16

Less the $70/sf in construction costs = $175.16

At 10,000sf of retail space per acre, the maximum price that should be paid per acre of Big Box space is $1,751,600.

Specialty Retail/Entertainment: $28.2/sf/year in income ($30/sf occupied; 6% vacancy)

To achieve the target cap rate, $28.2/total-value-per-sf must be equal to or greater than 7.25%, or: 28.2/.0725 = $388.97

Less the $85/sf in construction costs = $383.97

At 8,000sf of retail space per acre, the maximum price that should be paid per acre of specialty retail/entertainment space is $3,071,760.

Apartment: $8.78/sf/year in income ($1.10/sf/month = $13.20/year for occupied space; 5%

vacancy; 30% reduction of gross rental income lost to operating expenses)

To achieve the target cap rate, $8.78/total-value-per-sf must be equal to or greater than 6.75%, or: 8.78/.0675 = $130.07

Less the $95/sf in construction costs = $35.07

At 18,000sf of apartment space per acre, the maximum price that should be paid per acre of apartment space is $631,260

Office: $7.20/sf/year in income ($15/sf occupied; 20% vacancy; 40% reduction of gross rental income lost to operating expenses)

To achieve the target cap rate, $7.20/total-value-per-sf must be equal to or greater than 7.75%, or: 7.20/.0775 = $92.90

Less the $100/sf in construction costs = $-7.10

At 10,000sf of office space per acre per floor, the total loss on three-story office space construction would be $-213,000

An estimated 220,000sf of specialty retail entertainment space (10% of currently existing 2.2 million sf) and 700,000sf of big box space (25% of currently existing 2.8 million sf) is needed to meet unmet demand, translating to 70 acres of Big Box space and 27.5 acres of specialty retail/entertainment space.

30 acres of the site must be set aside for storm water management/wetlands, leaving a remaining 42.5 acres (170 acres of the original site -- 70 acres Big Box -- 27.5 acres specialty retail/entertainment -- 30 acres storm water management/wetlands = 42.5 acres).

Population density in the nearby city of Nashua is 4.4 people per acre. At 18 apartment units per acre and an average household size of 2.7, the density per acre of apartment-developed land is 48.6. A population density of 5 people per acre for the entirety of the 170-acre site would mean a maximum of 850 residents in the development, and 850/48.6 = 17.49, or approximately 17.5 acres of apartment complexes should be developed.

The remaining 25 acres of the sit3 (42.5-17.5 = 25) might be better devoted to additional Big Box or specialty retail/entertainment space rather than office space, but regardless these last 25 acres should not be included in pricing considerations, as revenue from this space is minimal at best given current projections.

The final pricing determination can be made thus:

Big Box: 70 acres x $1,751,600 max price/acre = $122,612,000

Specialty retail/entertainment: 27.5 acres x $3,071,760 max price/acre = $53,755,800

Apartments: 17.5 acres x $631,260 max price/acre = $11,047,050

Sub-total: $187,414,850

Initial Fixed Costs: $80 million ($40mil site costs, $40mil addl. costs)

Total max. that should be paid for the site: $107,414,850

REITS and Real Estate Ownership

Given the description of REITs and the overall industry provided in the case study, as well as the specific history and success of CBL a first a private real estate development company (a schedule C corporation) and then as a publicly traded REIT, there are several reasons that real estate ownership in the United States is so dominated by this and other publicly traded REITs. The fact that such companies are able to pass untaxed earnings on to shareholders makes ownership through a REIT more profitable than through many other corporation vehicles, as is demonstrated by CBL's own experience and growth as a company. This increased profitability of any REIT is an incredibly attractive feature to many smaller (and larger) investors when it comes to publicly traded REITs, as this allows for the direct profits of real estate earnings to be transferred to shareholders as dividends (and indirectly in increased stock value/equity) without requiring these investors to endure any of the hassle of real estate ownership. Public trading and ownership also allows for much faster capital growth and thus real estate holding growth, meaning that publicly traded REITs can grow much faster than private corporations and thus would easily -- and as history has shown, did easily -- grow to dominate the real estate ownership landscape in the United States.

Drawbacks to public ownership, of course, do exist. When compared to private corporations, public companies must keep a stricter eye on the short- and medium-term bottom line. There are also more owners and thus more decision makers that must be considered, stricter accounting and governance regulations that must be met, and a variety of other operational complexities that are placed under greater control and scrutiny in publicly traded companies.

Retail Strategy

The detailed pricing breakdown provided above also outlines the ideal retail strategy given the demand estimates and cost outlays presented in the case study. The seventy acres of Big Box retail space and the seventeen-and-a-half acres of specialty retail/entertainment space will precisely meet the projected unmet demand in the area, and the twenty-five acres remaining after the wetlands and apartment units have been set aside could likely be used at least partially to augment the site's retail offerings and generate greater competition with other nearby retailers, such as the enclosed mall. Retail space is by far more profitable to CBL than apartment or office space, and thus maximizing the amount of retail space included in the development of the site is quite obviously the ideal way forward with this development. Building retail space that will not be filled by retailers, however, would be detrimental to CBL's bottom line and its success with this new development, so extra retail in the twenty-five unspecified acres will have to be limited.

There are significant concerns with this development, including the proximity of a large enclosed mall, the possible complications of the nearby city of Nashua, and most especially the major reorganization of water management and land use that will be required. More in-depth analyses of each these areas is definitely warranted, especially because the deal could otherwise be quite profitable. An initial offer opening these considerations could certainly be made.