Many developers these days are stuck holding vacant land when the end users run for the hills, leaving construction plans on hold. Meanwhile, banks are squeezing credit-worthy clients and properties with reasonable equity asking for more guaranties, more equity, and more collateral. Bankers admit that they know they are damaging business relationships, but that they are “just following orders” to refuse loan extensions and insist on reappraisals (at borrower’s cost) to facilitate calling in loans on devalued property.
Even if banks aren’t squeezing, developers are faced with ongoing carrying costs associated with vacant land, such as taxes, insurance, mortgage payments, etc., resulting in pressure to generate some kind of revenue from the real estate. Here are a few strategies for developers to consider in the current economic market:
- Mine the Minerals. A well placed oil or gas well should not impede future development. In fact, some gas leases encumber property on which no well will ever be drilled, but the land is needed to comprise a ‘drilling unit’ (in Ohio twenty acres are generally needed to comprise a drilling unit). Review recent geological surveys to determine whether your property has any valuable raw materials.
- Grow Something. Depending on the topography and soils conditions, consider growing trees or other crops. If you do not have a green thumb, lease to someone else. If you establish an agricultural use, you might qualify for tax reductions. In Ohio, consider the Ohio Forest Tax Law which can yield a fifty percent (50%) reduction of local tax rates. Among other requirements, Forest land must be a minimum of ten (10) acres, with the primary purpose of growing, managing and harvesting of commercial species forest product via appropriate forest management procedures.
Alternatively, consider Ohio’s Current Agricultural Use Valuation which reduces land value for taxation purposes. Among other requirements, the agricultural use must occupy a minimum ten (10) acres (could be less, depending on revenue) and exist for at least three (3) years, but be wary of recoupment which could result in payment of taxes on normal valuation for the prior three (3) years.
- Communicate. Depending on property visibility and local zoning requirements, consider a billboard or cell tower. Of course, as with any type of real estate development, be sensitive to your neighbors. Many billboard and cell tower fights are due to remonstrance from neighborhood organizations and adjacent property owners. Be armed with solid knowledge of deed restrictions as well as local planning and zoning codes. Note that state statutes and local zoning ordinances likely require notice of proposed land use changes to neighborhood groups, adjacent property owners and certain local officials as part of a public review process.
- Alternative Energy. If an entrepreneur makes lemonade when life gives lemons, now is the time for property owners and developers to consider developing alternative energy sources such as wind turbines. Of course, consult deed restrictions and local zoning and building codes. In more urban areas, set backs and guy wire requirements alone may prohibit this use. There are also companies who place minimally intrusive hydro-electric generators on waterfalls. With all things in real estate, these will not harvest immediate riches, but may mitigate utility costs.
- Play Time. Again, depending on property size and zoning requirements, with relatively minor investment, a healthy liability policy and a conspicuous waiver, vacant land could be transformed to recreational uses: hunting reserves, cross country skiing, off road motor biking, golf driving range, bridal paths, etc.
- Conservation. As conservation easements are permanent, these are not recommended as temporary revenue solutions in this economy. However, if you are inclined to grant a conservation easement over a small portion of your property, have your accountant or tax attorney advise you as to the tax advantages for donations, estate planning benefits, and the overall reduction of your tax burden. Confirm that the grantee is a bona-fide 501(c)(3) a qualified as well as a land conservancy understate law. Note that once conservation organizations find a donor, they may want to know how deep the donative pocket is and will insist that the donor pay the cost of the conservation easement, assume the burden of maintaining the land in a natural state, and seek to hold the donor liable for any disturbances on the property, even for disturbances by third parties. If granting a conservation easement, do not be shy about requesting compensation. Feel free to negotiate the conservation easement to keep development open on abutting property and to minimize obligations and liability within the easement area.
- Alternative Financing. Seller financing, land contracts, leasing to own, option agreements should all be considered to inspire purchaser traffic for unused property. The hitch here is what your lender will tolerate if a maturity date is fast approaching. Most lenders will not consider maturity date extensions in advance (assuming the financing instruments have not extension options) in order to keep the pressure on for refinancing, sale or credit enhancements (guaranties, additional equity or additional collateral). If you’re lucky enough to own property free of any financing, and you’re not in need of a lump sum, seller financing may actually be an excellent investment opportunity, yielding better interest rates than many other investment vehicles, on property you already know.
- Approvals. While the planning authorities are less busy in this economic climate, it may be a good time to complete site plan approvals, obtain building permits or seek zoning changes. Take care to obtain some level of flexibility and time extensions to commence construction for when the economy rebounds. While the approvals may increase value of the property and posture the property as ready to develop, the approval process will cost considerable money and approvals may need to be amended if end users don’t return or modified to accommodate a different type of development, which will add costs. This is a speculative move, so use careful judgment in proceeding.
What will likely emerge in this economy are hybrid financing vehicles, combining elements of traditional financing, with creative capital structures, bond financing or other recent but temporary government incentives. Sadly, it is not likely that spreading the risk over various funding sources will cause lenders to be any less risk adverse. Also, transactions will become more complex and creative. Lenders and investors who will survive will be the ones willing to take risks as a team and find creative revenue methods for undeveloped property.Copyright © 2012 Taft Stettinius & Hollister LLP. All rights reserved.