Land values won't be the only thing that will be reset following what will end up being a massive redistribution of assets.
Also getting a makeover will be the myriad of land plans that were shoved through the local approval systems during the high flying days of yore. Because the economics of today have changed so drastically, many of the land plans that spent years going through approvals are no longer viable in today's market.
"The reason [some] land has negative value [today] is because the plan was appropriate five years ago," says Barry Gross, founder of Developers Research. "The plan has to change to make some land more valuable."
And if there was ever a time to go back and re-examine plans, it's now; many developers are expecting to sit on whatever they acquire in the short term for between five and seven years.
"Now you have the luxury of time to go back and look at those plans," explains Steve Vliss, CEO of Highpointe Communities, a private-equity California land investor and developer. "[Lots of plans that] clearly don't make sense now or even in a recovery market?they probably never made sense even then."
The other plus is that local jurisdictions and regulatory agencies appear to be softening a little. Rick Peters, a consultant with RE Peters Company who acts as a middle man between bankruptcy courts and municipalities to renew permits and such to better position land for liquidation. And the fact that many municipalities are also beginning to defer impact could also be a sign that the municipalities are more open for negotiation.
"They still have their policies and procedures, but they have their doors open. The level of it is unprecedented," says Peters.
But for all the changes to land plans, developers' game plans are likely to change as well. Even as new capital comes into the market to replace capital that has exited, it will show up first on the acquisition side of the equation. Infrastructure financing and construction loans are likely to remain difficult to obtain in the short term. Moreover, capital sources will look to insulate themselves from risk by requiring additional covenants or making capital more expensive.
"The risk profile for a residential developer for the next five to seven years is going to be much higher than they have been for the last five to seven years," says Robert Freed, CEO of Summerhill Homes. "We've typically been able to find new sources of capital to replace sources of capital. ... But I don't know what their capital is going to cost."
Freed anticipates that an increase in the cost of capital will challenge the developer model. As the new capital ups its preferred return from a range of 10% to 12% to 15% to 17% and its internal rate of return requirement from roughly 18% to between 20% and 22%, it will pressure the developer margins. However, Freed says he expects that builders have been penciling deals off the assumption that the builders to whom they flip off developed lots will be happy with a slightly reduced margin on the home they will build of 8% versus a typical 10%. However, the developer isn't counting on the fact that for the builders to get access to capital to either buy the lots or finance the vertical construction, they'll need a much higher margin?perhaps even in the range of 10% to 15%.
"Builders will demand more profits and the only place that can come out of is the land," he says.