One of the guiding principles in real estate is the idea of highest and best use.  This refers to the most profitable, legally permissible, physically possible, and financially feasible use of a property, which results in the highest value.

If you’ve ever noticed a low-rise building being torn down and replaced by a high-rise building, it’s following this principle.  At one point in time, a smaller building of a couple of stories was the highest and best use of that property, but over time, things changed.  In many cases, increasing densification and demand for a certain type of real estate means that the highest and best use is no longer the same as what it was in previous years.  Perhaps there is now more demand for housing and a condo building is being built, or perhaps the street the property fronts upon has grown increasingly busier, and a retail plaza is a better use than residential houses.

While it is sometimes possible to effect a change in the highest and best use of a property without needing more property, it often requires land assembly in order to make the change.  As the name states, land assembly is when someone – typically a developer – buys up a number of plots of land in a row in order to build something.

Let’s talk about what causes this to happen, how the numbers need to work, and when land assembly really works in your favour.

It’s officially a plan.

While it may not always feel like it, most municipalities have a plan for growth and development, including land use as well as infrastructure needs.  If you search for “<YOUR TOWN NAME> Official Plan” online, you’ll likely find a section of your municipality’s website that sets out a framework for managing physical change and land-use decisions over the next 20 to 30 years.

These aren’t simply theoretical documents that were developed and then put off to the side.  In fact, if you ever wonder why your town is growing in a particular way, odds are pretty good that the official plan dictated it.  They’re used by city planners, officials and staff as the framework for how it will grow and change.

An Official Plan covers off things like:

• Land Use Designations: Defines areas for residential, commercial, industrial, agricultural, recreational, and other land uses.
• Growth Management: Guides how and where the community will expand, including policies for urban boundaries, intensification, and density targets.
• Infrastructure Planning: Addresses transportation networks, water supply, wastewater management, utilities, and other essential services.
• Environmental Protection: Incorporates policies to preserve natural heritage features, water bodies, forests, and environmentally sensitive areas.
• Housing Policies: Provides strategies for affordable housing, mixed-use development, and diverse housing types to meet community needs.
• Cultural and Heritage Conservation: Protects areas of historical, cultural, or architectural significance.
• Public Consultation and Participation: Ensures the community has input through public meetings, workshops, and other engagement tools.
• Implementation and Monitoring: Outlines how policies will be enforced, reviewed, and updated over time.

The Official Plan – and changes to it – have a big impact on when land assembly makes sense.  As an area changes over time, it can become apparent that the historic use for a given property may no longer be the best option.  What is less clear, is when the Official Plan permits a change to be made.

Consider a plot of farm land, zoned agricultural, that is slowly encroached upon by a growing town.  For a number of years, running a farm on that land was the highest and best use.  As developers build subdivisions nearby and demand continues to increase, housing may become the highest and best use for that farm land.  Despite the economic rationale, zoning and other aspects dictate whether a change can take place.  Unless there is support for changing the zoning from agricultural to residential, no developer is buying up that farm land for a new subdivision.

This sort of thing also takes place at smaller levels in existing residential properties within towns.  The Official Plan is often designed with change in mind and the zoning for properties adjacent to a major road are typically more flexible than a property on a lower traffic street.  As cities grow, it is not uncommon to see amendments made to the Official Plan that suddenly change the possibilities for certain properties.  Whether it is a result of changes to the Official Plan or just changes to the town itself, when a new opportunity for the best and highest use is possible, land assembly can start being considered.

An important part of that consideration is what is required under the existing zoning.  Many municipalities put in requirements for minimum lot frontages or minimum lot areas in order for a new use to be possible.  These requirements mean that a property that is technically zoned for the new, now desirable use, may not be permitted to move forward due to the size of the lot.  This is done in order to encourage land assembly if the municipality prefers to see a smaller number of larger developments, rather than a lot of small, one off developments.

The math still needs to math.

At the heart of any land assembly are the finances.  Unlike a change to the highest and best use when it is just taking place with an existing property, if there is land assembly involved, it means buying additional plots of land.

The pro forma calculations for a development are complex and there are always uncertainties around specific numbers.  Depending on the type of development, the length of time involved can span years and real estate markets can change considerably during that time.  As a result, when a developer analyzes the financial feasibility of a project, they need to build in a safety buffer when it comes to the expected eventual sale price.

When some costs are incurred later and cannot be set exactly – and when revenue is only fully realized at the end of the project – the cost of the land being acquired to begin the project is often where the greatest clarity can be found.  As a result, this is also where a project can be cancelled before even starting if the numbers don’t work.

While developers need to buy the properties in a land assembly at a price that works for the projected eventual sale of the new development, the owners of those pieces of land also need to be offered prices that make it worth selling.  At a bare minimum, a developer needs to be able to offer more than the lot is worth at its current use, or a sale won’t take place.  If there is a negative bargaining zone, where the owner could sell the land at its current use for more than what a developer is willing to pay, the property will remain in the current use.  It can take some time before a marginally feasible development becomes lucrative enough for a developer to pay the necessary price to assemble the land.

In other cases, the numbers work very clearly in favour of a development being the new best and highest use.  In such cases, a developer can offer substantially more to the owners of the required land than anyone intending to keep the use the same.  We’ve worked with a few clients that have been the beneficiaries of this sort of situation, where they’ve been able to sell a residential property for considerably more than it would be worth to someone intending to keep the home there.  The price offered is dependent on the finances (and likely profits) of the future development, but it can range from hundreds of thousands to even millions more than they’d otherwise receive for the property.

Being last is best.

In any land assembly, the last property that is necessary is often the most expensive piece.  If a developer has all but one piece of land for a desired project, the remaining land owner has a lot of leverage to push on the purchase price.  While the numbers still need to work for the feasibility of the project, the final piece in the puzzle is the most valuable.

Consider a development that requires five plots of land for the optimal design and profitability of the project.  If the first four pieces of land are purchased for $1M each, but the fifth piece initially refuses the offer, the likelihood of a purchase price over $1M is strong.  While all developers will seek to minimize the cost of land assembly, the math is what dictates their maximum price.  In the above example, if the project was worth doing if the land assembly cost less than $8M, that final piece of land has a theoretical value of $4M to the developer.  They naturally won’t want to pay that price, but they could in theory pay up that price.  It is for this reason that developers often try to negotiate a group purchase from all of the required land owners.  While it may seem like this would result in a premium being paid by the developer, as they weren’t able to purchase some properties at a bargain price, it avoids the situation where the final piece of land is substantially more expensive than all the others.

While land assembly isn’t nearly as common as the purchase and sale of properties for their continued same use, it does happen in growing communities.  If you’re interested in investing in properties with a significant eventual upside, or have land that you think might be suitable for land assembly, then get in touch with us to discuss how to proceed!

We see a lot of real estate listings on our team and we would say we’re pretty hard to surprise when it comes to choices made by listing agents.

Whether it is a poor decision on which photo to use, misspelled or improperly used words or just an overall low level of effort put into the listing, we regularly see listings that could use some improvement.

In our work with a client this past week, we came across a listing for a semi-detached house located in the east end of downtown Toronto.  Here’s the run down.

• It’s an income property, with four rental units in it, bringing in about $90K a year in rental income.
• It’s registered as a residential property having three self-contained units, but it isn’t unusual for a basement unit to be added into the mix.
• It’s a pretty small lot, under 20 ft wide and it is also shallow, at just 70 feet deep.
• There are no parking spaces with the property, but it is close to some TTC stations.
• It’s being sold in “as is, where is” condition, so probably not in the best shape.
• It has been on the market for 100 days as of the date of this article.
• The last time it was on the market was back in 2008 and it was for sale for $750K. It didn’t sell and the same owners have held onto it since then.

The only other thing you should know about the property is the list price, which is $25,000,000.

Yes, you read that correctly, they are asking $25 million.

If you do the math, that works out to over $1.3M per foot of frontage.  We know Toronto real estate is expensive, but that feels a bit excessive.

Is it the cathedral ceiling in the 3^rd floor living room that allows it to ask this price?  Or the fact that it is a vintage Victorian home that comes with central air conditioning?  The answer lies outside of these features and above the home itself.  Here’s why they are asking this price and why they think it’s worth it!

A zoning change can mean a huge valuation change.

The first clue as to why the list price for this small lot with a semi-detached house on it is $25M can be found in the remarks for clients on the listing, where the agent says “Zoning Recently Changed To Allow Up To Approx 30 Storeys”.

While this building has sat on a busy street near lots of commercial properties for decades, it is just recently that the zoning was changed to allow for “as of right” heights that would make building a condo tower possible.  A quick review of the prior zoning for the property shows it was 16 metres, which is a far cry from 30 storeys!

It’s not the air conditioning, it’s the air rights.

While this property has been listed a semi-detached, the list price is actually reflective of just the land value.  The building on the property, the tenants in place, the improvements done over time, the rental income – all of it pales in comparison to the value that a developer could realize by tearing down the existing structure and building a new, high density tower on the lot.

It is what is above the existing house, the air that the property also has the right to build up into, that makes this property worth a lot more now that it used to be worth.  Just 14 years ago, the seller would have taken $750K for the property, but with these zoning changes, they are now asking for over 3000% more!

Will they get it?

That is of course the big question.  Anyone can ask any price for a property.  In order for a deal to take place, you need a buyer who is willing to pay a price that the seller is willing to accept.

There are other nearby listings for similar properties in a similar situation that are asking for even higher prices.  When a developer is considering buying a small plot of land for $25M or $40M, they need to have a very good handle on what it will cost to build a high-rise tower, how long it will take, what financing is available and what the eventual sale price of the units in the tower could be in a future market.

It’s a complicated exercise, and only time will tell if the sellers of this property have stars in their eyes or if they will realize a huge windfall from the zoning changes that have been put in place.

Not all zoning changes are as dramatic as this example, but the value of any property can be significantly impacted by what is permitted to be built on it.  When the highest, best-use for a property changes, the value can change accordingly.

If you love the idea of buying a property that could see a huge value increase due to a zoning change, then let’s talk.  You can get in touch with us here.