For commercial real estate developers, one of the major challenges of developing a large scale project is finding a parcel of land that is big enough to accommodate the planned project. This challenge is particularly acute in large, urban areas – like New York City or Los Angeles – where land is at a premium. To address this challenge, developers may spend years buying up small, individual, adjacent parcels until they have enough space to accommodate their project.
In this article, we are going to discuss the concept of plottage in real estate. We will describe what it is, why it matters, and how it differs from a commonly confused term – assemblage. By the end, readers will know what plottage is and will be able to incorporate this knowledge into their pre-investment due diligence process.
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What is Plottage in Commercial Real Estate?
“Plottage” is a term that refers to the increase in valuation realized when many smaller parcels of land are combined into a single larger parcel. To explain this, an example is helpful.
Suppose that a developer wants to construct a large, grocery store anchored shopping center/income property on the outskirts of a major urban area/real estate market. Unfortunately, there is no single parcel of land large enough to accommodate the planned center. So, the developer chooses to take the long view and spends three years buying small, adjacent lots until they have a single, contiguous parcel that is large enough to accommodate their planned project. In addition, they go through all of the legal and regulatory paperwork to have the local municipality recognize this parcel as a single large plot of land, not several smaller parcels.
The resulting increase in the market value of the single large parcel is the plottage. The value goes up because the commercial property that can be constructed has a higher value and increased usability than the sum of what could have been constructed on the individual parcels.
Understanding Plottage in Commercial Real Estate Investments
For individuals considering an investment in a commercial real estate deal that includes assembling a plottage, there are three things to know.
First, it can take a very long time. It can be difficult and time consuming to convince property owners to sell their parcel. It is definitely a long term proposition.
Second, it can be incredibly expensive. Often, there are one or two holdouts who are unmoved by the goal of the project. Their refusal to sell can create major delays for the project and the only way to convince them may be to pay far above market value for their real property. These holdouts have all of the negotiating leverage and they know it. Or, some of the properties have existing encumbrances that must be cleared before title can be transferred. In some cases, working with a commercial real estate broker or commercial realtor can be helpful to overcome this issue.
NOTE: Government agencies or cities may face a similar issue when trying to create a plottage for a large public use project like a water plant or highway. Unlike private developers, they have the power of eminent domain, which is the legal process by which they can take ownership of an individual parcel by paying fair market value for it.
Third, because of the time and expense associated with creating a plottage, the risk in this type of deal is on the higher end of the spectrum. From parcel holdouts to interest expense, regulatory barriers, community opposition, and market risk there are many potential risks that must be considered with this type of real estate investment.
Plottage vs Assemblage
The term plottage is often confused with a similar sounding term, assemblage.
As described above, plottage is the difference (increase) in value of the single larger parcel when compared to the sum of the smaller parcels. Assemblage refers to the process of buying and combining all of the smaller parcels into the large one.
For commercial real estate investors, the implication of assemblage is the same, it can take a really long time and it can be very expensive.
Investing Through Private Equity Real Estate
As described above, there are many risks associated with a deal that requires buying and assembling many parcels of land. For all but the most sophisticated individual investors, the capital and time commitment required to do so is likely to be too much. These deals require institutional capital, a long term view, and real estate domain expertise. Enter the private equity firm.
Private equity firms are companies that invest in the privately held equity of other companies, including those that own real estate. In the private equity structure, capital is raised from hundreds or thousands of investors and combined with debt to create a formidable pool of capital. This money is combined with the private equity firm’s institutional knowledge and industry relationships to tackle the herculean task of creating a single large parcel and determining the highest and best use for it.
So, the point is, individual investors looking to get involved in a commercial real estate deal that requires assembling land are probably better off partnering with a private equity firm than attempting to do it on their own.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Real Estate Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.
