DECEMBER 14, 2001
Posted by EricC on December 14, 2001 at 12:44:52:
The question of how to “yank the land” comes up from time to time. So, now you're determined to separate the land from the buildings?
OK, let's think out loud then - Why was this "option" so popular in the past?
I think the underlying conditions at the time had a lot to do with so many variations of these being used in the condo industry.
1. Market mindset -- many, if not most of the people who were being sold condos (at the time) were either apartment dwellers or unsophisticated investors. Pure and simple. Long term thinking was not their strong suit (nor of the developers either, but that's another story).
2. Lenders at the time were just beginning to experiment with new "lending guidelines" and many were overly excited about the possibilities for joint ventures (with RE people and others). All parties seriously overestimated their abilities.
3. As the lenders and developers became increasingly optimistic or desperate (take your choice) they began to focus on attracting buyers. And as any "don't want-er" can tell you, the easiest way to dramatically increase the number of potential buyers is to simply lower the price.
So we have a target group who couldn't care less about future appreciation, developers and lenders bound together by the twin emotions of fear and greed, ever increasing costs, and regulators (and the economy) preparing to end the party for everyone. What was that about necessity being the mother of invention? Necessity has nothing on desperation I can tell you.
The ground leases were used as a means to "lower" the entry costs for buyers. And by separating the land from the improvements, lenders could then be talked into releasing some of those units (and getting this c#@p off their books or onto someone else's).
That ain't all.
Since it was the land valuation that started the whole messy process in the first place, more methods were developed to artificially inflate the price -- often in a matter of hours. We're not talking about "get the deed" here. It was more of "pass the deed" around and around.
Other "possibilities" were experimented with as well. Remember equity sharing? Long before that Simon guy was on TV, developers were touting this as the greatest thing since sliced bread -- and for them, it was. They sold their inflated units to two short sighted idiots rather than one. There are probably some inventive ways to use some of these techniques, but my guess is that most are far beyond the scope of this post.
In the meantime, you might think of it like this: if you can convince someone to purchase the property (without that ground), you might actually have it (the ground) revert to another party at some point in the future -- say a pension plan? Maybe even your own?
In fact, you could have purchased, split, optioned, and leased all this while it was under your ownership and control. That's the time to make those radical changes.
And unless you regularly argue with yourself and lose (no offense to those bipolar folks in the audience) you should be able to come up with a way for the proper benefits to be transferred (at some point) to those parties who both value them (properly) and need them.
But then you already knew all this, yes?