A developer who paid cash for land five years ago, built, leased up and is now collecting rent has an asset working hard above ground and one doing nothing below it.
The default move is a cash-out refinance. On a stabilized asset with an in-place loan at an attractive rate, that means giving up the rate, paying whatever prepayment the note demands, and re-underwriting the whole property to get at equity.
A land sale reaches the same equity without touching the building's debt, as long as the existing mortgage can be dealt with. Which is the one real constraint, and it is worth getting to early.
Our lease is unsubordinated, always. An existing fee mortgage cannot remain in front of it. In practice that means the land purchase, together with a new leasehold loan on the building, retires the existing loan at closing.
Which makes the note's prepayment language the first thing to check, before anything else. Yield maintenance or a hard lockout can make an otherwise excellent trade uneconomic no matter how good the land number is. Check it before you spend time gathering anything else.
Stabilized NOI and what you paid for the land. Rent is sized at 25–30% of NOI, capitalized at a long-term land yield, and capped at 35% of appraised value. Those two constraints usually converge within a narrow range, which is why a defensible number comes back fast.
Then the honest question: what is the money for? If the answer is a project you are starting next, the land under the finished one is usually worth more as funding for the new deal than as cash in an account.
If there is an existing fee mortgage, yes, because our lease is unsubordinated and that loan cannot stay in front of it. We arrange the leasehold debt; we never hold it.
Prepayment language on the existing loan. Check yield maintenance and lockout before anything else.
Rent at 25 to 30 percent of stabilized NOI capitalized at a long-term land yield, capped at 35 percent of appraised value. On $535,000 of NOI that is roughly $2.2 to $2.7 million of land, subject to the appraisal cap.
No. Their leases are with you and nothing about their occupancy changes.
Stabilized NOI and your land basis. That is enough for a first number. Documents come later.
The land, on a 99-year lease: nothing to manage, senior to the building’s lender, low yield because the buyer is buying the right to not pay the tax. The building above it: higher yield, paid monthly, depreciable. Both are replacement property. Both close on a date we control, which is the part that matters on day 140.
1031 SolutionsWorking with an intermediary? The standby sheet for line 3 of the identification form.
Stabilized NOI and what you paid for the land. A land price, the annual rent and the coverage back inside a week.