Cycles, Write Downs Provide Development Opportunities

By Bruce Davis, Principal, Lee & Associates Atlanta: In economic expansion eras, developers often get overzealous in bidding up the prices of land acquisition for their projects.

Investment-Bruce-DavisIn economic expansion eras, developers often get overzealous in bidding up the prices of land acquisition for their projects.

The costs of overpriced land is often the silent, but ever-present kiss of death for a project that eventually leads to ruin, foreclosure, and oftentimes deals that never get out of the ground.

In Atlanta, we have seen this many times, especially in this last ‘trough’ or recession. Deals that come to mind include Hal Barry’s Allen Plaza in the CBD, a bold project of several city blocks that successfully arose from the ground of several downtown parcels. Though driven by some key lead office tenants, condos, and a gleaming new “W” Hotel complete with a rooftop helicopter pad, upon completion, lease-up began to slow, and condos sold at discounted prices, eventually going back to lenders.

Another key project is the heart of Buckhead mixed-use project masterminded by Ben Carter, which was to rival Rodeo Drive with posh, ultra high-end retailers surrounding a massive high- rise residential complex of luxury residential rentals. This section of Buckhead was painstakingly assembled by Carter over a number of years, being created from what was once “the village,” made up of a slew of low-end, but well-patronized bars and restaurants. Despite pressure to close these establishments from the local municipality to assist with the cost of putting this patchwork assemblage together, it is this writer’s studied opinion that those early little specks of land costs eventually led to the project’s undoing. Cranes were erected for the deal, but they sat idle for more than a year gathering rust until the fat lady sang. West Coast-based Oliver MacMillen has taken over the project and they are seemingly moving forward with the renamed “Buckhead, Atlanta”

Avalon, a major mixed-use project in the northern exurban Alpharetta, one of the highest per capita neighborhoods of the SMSA is being built by North American Development. Avalon is slated for several types of urban high density residential, grocery, shops and restaurants that promises to be leading-edge design and land use. Mark Toro, CEO of North American, has admitted publicly that this project would never have been feasible unless it were aided by a favorable entry pricing from bank-type Sellers who had taken the property, plus some heavy infrastructure investments back in foreclosure from a previous failed developer who had abandoned his efforts.

Location means everything. Available land is the siren song for developers who race and fight for the best location, those sites that lie within the path of growth, demographic patterns, transportation corridors, school districts, juxtaposition to employment nodes, etc. But the cost of land must not overburden the capital stack. Interest carry on an imbalanced line item summary that is paying for an overzealous entry price is ever-present and can adversely affect what should otherwise become a successful and vibrant project.

Hosts of other projects dot the Atlanta landscape that bear the scars of a project once started, then reset when a lower land basis could be achieved. As a developer, how can you get the cost of your land down? Public-Private Partnerships seem to be the rage. Tax abatements? Tax allocation districts? Bond-financing?  Inducements from the public sector can be a godsend, but can also lead to a trap. Sometimes there are no hybrid Wall Street-oriented financing tricks or tools that can overcome the problem of paying too much for the dirt.