Land Investment, Present and Future, a Discussion with Rich Samit.

Net Lease Insider sat down with Rich Samit, Founder and CEO of Fraser Forbes Real Estate Services, the leading firm in the Mid- Atlantic region handling land sales, financing, management and advisory services. Net Lease insider sought to discuss the outlook of land and its implications on the net lease market.

The discussion centered around five questions and produced some very interesting results:

Q1. Why do so many land owners consider a net lease asset as a replacement property?

A1. Like land, a net lease investment is “passive”, requiring no action on the owner’s part to maintain. For owners of land, who are not accustomed to taking an active role in property management, a net lease ensures their management responsibilities remain the same. This also translates into greater flexibility relating to location. As management never comes into play with a passive investment, proximity is of no consequence, allowing for wide range of geographical possibilities.

Furthermore, a transfer from land to a net lease is also a transfer from a non-depreciable asset with no income (land) to a depreciable asset with income (net lease). The advantages here are clear; the net lease allows for use of the depreciation tax shield while collecting income for the owner, making it an attractive option.

Q2. As a follow-up question, do most investors selling land consider doing a 1031 exchange?

A2. Normally a 1031 exchange would come into play because owners of land generally see appreciation in their asset and would rather defer it than pay taxes on it. However, land purchases in the last few years were subject to the bubble of price inflation and today are not faring well. If you bought land from 2004-07, you are most likely flat or underwater. Because no gain is observed, today most investors have no need of the 1031.

Q3. Have you started to see an increased number of 1033/eminent domain transactions due to increased government infrastructure appropriation?

A3. In the last 12 + months there has been a 20%-30% increase in the number of 1033’s seen. There are many government projects underway such as Metro’s expansion to Dulles Airport, the hot lanes in Maryland and Virginia, the ICC and purple line in Maryland, and other various state needs on both sides of the Potomac river. As a result, the construction of such facilities has forced people into 1033’s through eminent domain. Deals involved cover a wide range, going from $1 million to as much as $50 million in some cases and net lease investments have been one of the favored asset classes for reinvestment.

Q4. At what point in this cycle will investors start to recognize land as a very undervalued asset opportunity?

A4. The bottom seems behind us in terms of residential real estate. Many developers who haven’t been active in 3+ years are building up their land assets as that market begins to recover. The picture is less positive on the commercial real estate side. Prices continue to fall and until they hit bottom, investors are holding back.

Q5. What is the current state of land as an investment opportunity?

A5. The best opportunities today are large raw residential or mixed use land investments in the urban and suburban core. Though they require a large amount of capital to purchase and maintain, many deals can be purchased at discounted prices and will definitely see a high level of appreciation in the future. Also, any investment near new infrastructure developments such as mass transit systems and power life style centers has a lot of growth potential.