Is that piece of dirt a good deal? Part I

by Geoffrey Butler, AIA

Anytime you need to build, you usually have to acquire the land to build on. Obviously there are primary concerns that you have to verify: zoning, access, utilities, restrictive covenants, topography, etc. But, how can you tell if the land is going to be a good value? Anyone can pay too much; it takes a pretty savvy buyer to get the best deal.

The first thing you have to do is to compare the cost of the land to other similar parcels in the market on a simple cost per square foot basis. Comparing cost based on asking price is relatively easy. However, they all might be asking too much. You really need to find out what similar tracts have been selling for. This requires a bit of work. Your Realtor is a key element here since a really good commercial Realtor will have first hand knowledge of the recent land sales.

You need to understand that much like anything, the larger the parcel the less cost there is per foot. There are many reasons for this. Mostly, it has to do with the cost for the developer to provide infrastructure to that parcel. The cost to extend utilities to a ten acre parcel is often less on a cost per square foot basis than it costs to bring utilities to 10, one acre pieces. But there are also inherent market forces which drive the cost of that one acre piece up higher than the cost per square foot for the ten acre piece. It is just like buying ketchup. A 10 oz. bottle of Heinz 57 might be $1.00, while a gallon jugmight be $4.00.

Figuring out how much land you need is relatively simple once you know what you need to put on that land. Generally, a floor area ratio (FAR) of .25 would apply for most commercial buildings. This means that if you have 100,000 sq.ft. of land, you would have enough room for a 25,000 sq.ft. building with the necessary parking. Facilities with loading docks, drive through banking lanes or unusual circulation needs on site will change that some. However, for most uses you should start with that FAR in narrowing the sites down.

Next week I will continue this discussion on purchasing real estate, and factors that can affect the use of the site.