The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
When you’re evaluating a land purchase opportunity for commercial real estate development you want to look at land use, density, and location first and foremost. These factors will determine what development projects would fit where, what investments would be most successful, and what opportunities you have for the development as a whole. This will tell you what the land value really is, and what potential may be resting in it.
How do you evaluate land purchase opportunities when it comes to commercial real estate development projects? So, the value of land is always a function, of course, of location. But possibly more important than location is zoning and use and density. So the value of land is determined by what you can build on it, right? And that sounds very simple, but it actually is not always super easy to figure out because if you know that a piece of land could have a 7 story apartment building on it, well that doesn’t tell you how many units you can get on it, or how many square feet. You have to have an architect actually help you sort all that out. And then you have to run a financial model, and then you have to work with your contractor, and engineers, try to figure out what the cost would be. So, first and foremost, the value of land is determined by the density of what you can put on it and what is merited – meaning is it in an industrial area, is it in a hot multi-family area, is it in a cool downtown where an office building would work, is it five minutes from bars or restaurants or whatever. So really I would say land use, density, and location are the determining factors.
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