Carried Land Play
A strategy in real estate development where a developer purchases a property with in-place income (i.e. land or buildings that are earning income from rent), and then uses that income from the property to carry the cost of ownership of that property until a higher and better use is ready to develop. At the end of the carry period, the developer will either demolish the existing improvements and replace them with new improvements that can be leased at a higher rate or add new improvements alongside the existing improvements.
Either way, the in-place income carries the cost of ownership until such time that a new configuration yields a much higher income. You can see this concept modeled in my Apartment Development Model here:
Putting ‘Carried Land Play’ in Context
Scenario:
Desert Horizon Development, a real estate development firm based in Phoenix, Arizona, specializes in opportunistic investments. Their latest acquisition, Suncrest Plaza, is a 33,000 square foot convenience (unanchored) strip center built in the 1960s. Located in a rapidly growing suburb of Phoenix, this property has served the community for decades but is now situated on land zoned for mixed-use development with a FAR (Floor Area Ratio) of 2.0. This zoning change presents a significant opportunity for Desert Horizon to redevelop the site.
Current State:
Suncrest Plaza currently has a FAR of 0.25, meaning the existing improvements utilize only 25% of the allowable buildable area. The strip center includes a mix of long-standing tenants, such as a dry cleaner, a small café, and a local hardware store, generating a steady, albeit modest, income. Although the center’s physical structure is outdated, it remains 85% occupied, bringing in annual gross rents of approximately $400,000.
The Carried Land Play:
Desert Horizon Development identified Suncrest Plaza as an ideal candidate for a carried land play. Given the current zoning that allows for a FAR of 2.0, they envision a future mixed-use development that could include retail, office, and residential components, potentially expanding the rentable area to 264,000 square feet—eight times the current square footage.
However, before they can move forward with redevelopment, the firm needs to secure entitlements, navigate the rezoning process, and wait for market conditions to mature, which could take several years. During this interim period, Desert Horizon plans to “carry” the property using the income generated from the existing tenants. The $400,000 in annual rents will cover property taxes, insurance, and maintenance costs, and contribute to financing the entitlement process.
Future Vision:
Once entitlements are secured and market conditions are favorable, Desert Horizon Development will likely proceed with demolishing the existing strip center and replacing it with a state-of-the-art mixed-use complex. By doing so, they will unlock the full potential of the site, capitalizing on the new FAR of 2.0. The increased density could significantly boost the project’s revenue potential, transforming the current $400,000 annual income into several million dollars per year once the new development is fully leased.
Conclusion:
This hypothetical scenario illustrates the carried land play strategy in action. Desert Horizon Development is leveraging the existing income from Suncrest Plaza to offset holding costs while they prepare for a major redevelopment. The carried land play is particularly effective in markets like suburban Phoenix, where land values are rising, and zoning laws are evolving to accommodate higher densities and mixed-use developments.
Frequently Asked Questions about Carried Land Play in Real Estate Development
What is a Carried Land Play?
A Carried Land Play is a strategy in real estate development where a developer purchases a property with in-place income (e.g., rent from tenants) and uses that income to cover ownership costs until the property is ready for a higher and better use. As stated: “the in-place income carries the cost of ownership until such time that a new configuration yields a much higher income.”
How does a developer benefit from this strategy?
The developer earns income during the holding period, which helps offset costs like taxes, insurance, and maintenance. Later, they can redevelop the site to increase its value. In the example, the developer “leverages the existing income from Suncrest Plaza to offset holding costs while they prepare for a major redevelopment.”
What makes a property a good candidate for this strategy?
Key factors include in-place income, underutilized zoning (e.g., low FAR relative to what’s allowed), and future potential for redevelopment. For example, Suncrest Plaza has a current FAR of 0.25 but is zoned for a FAR of 2.0, indicating “significant opportunity… to redevelop the site.”
What role does zoning and FAR play in this strategy?
Zoning and FAR determine the allowable density and use. If current improvements underutilize the site (as in the case with a FAR of 0.25 versus a permitted 2.0), there’s room to develop much more rentable space. This creates long-term value for the developer.
What are the risks or limitations of a Carried Land Play?
Risks include delays in rezoning or entitlements, changes in market conditions, or loss of tenants before redevelopment begins. The strategy assumes the in-place income is sufficient to “carry” the property, which may not always hold true over time. [Answer implied but not fully detailed in transcript.]
How does the Suncrest Plaza example demonstrate this strategy?
Suncrest Plaza generates $400,000 in gross rent annually, covering costs during the entitlement and planning phase. Later, the plan is to redevelop the site into a high-density mixed-use complex, potentially increasing income “into several million dollars per year.”
What types of improvements can be added or replaced during redevelopment?
Developers may either demolish existing structures and build new ones or add new improvements alongside the current ones. The goal is to increase leasable space and rental income, often shifting to higher-value uses like mixed-use, residential, or office.
How long does the carry period typically last?
The carry period can last several years depending on how long it takes to secure entitlements and for market conditions to become favorable. In the Suncrest Plaza case, the developer expects to “wait for market conditions to mature, which could take several years.”
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