Assets in a commercial real estate portfolio generally fall into one of three categories: supportive, missing (or gap), or unsupportive.
When unsupportive assets are identified through portfolio optimization, disposition of these assets may provide an opportunity to create cash flow, reduce operating expenses, or mitigate liabilities.
There are a number of actions an organization can take to realize these benefits:
- Reposition the asset to become supportive.
- If the asset is leased, sublease it, exercise early termination rights, or negotiate a lease buyout.
- If the asset is owned, lease or sell it.
It’s not uncommon for an organization to devise a strategy to dispose of unsupportive assets, like excess office space or a distribution facility in a sub-optimal location, at some point. It’s also possible that merger and acquisition activity (resulting in a change of plans for an asset) or other unrealized projects (think: an expansion that never happened) could leave an organization with an unsupportive asset as straightforward as vacant land.
If a portion of an asset is supportive, but excess, unsupportive property remains, its owner may have the option to subdivide and sell the excess land. This is referred to as a CRE lot split.
Read on to learn more about lot splits and the key aspects that should be considered while handling them.
What Is a CRE Lot Split?
A CRE lot split involves subdividing commercial property into two or more parcels. The lot cannot be split unless it meets the minimum area zoning requirements, or until a special variance is obtained.
To understand the logic behind a lot split, it’s important to understand the definition of excess land.
Excess land is larger than what is typical for the area, and therefore, capable of a separate use. Because of the law of diminishing returns, which means the price per square foot of a smaller lot is generally higher than for a larger lot, a CRE owner can often increase the value per acre of the land by subdividing it into lots, then selling it to two or more buyers.
5 Steps Involved in CRE Lot Splits
The process of splitting a CRE lot can take several months for a property owner to fully complete.
1. Evaluate the Risks
Assess the risks associated with a potential lot split with a feasibility study. The limitations posed by future development restrictions, like nearby sewer systems, existing easements, like a gas or electric line, and site-specific restrictions, such as proximity to hazardous waste areas, are all important to consider. It’s also necessary to determine how market demand may impact the likelihood of selling the lot(s).
2. Check for Zoning Restrictions
Zoning restrictions are local laws governing the use of a lot, whether for residential, commercial, or mixed use purposes. They also can determine minimum and maximum lot and building sizes, as well as property line setbacks and building coverage.
3. Request a Survey
To determine where plot lines need to be placed, request a survey that contains data about privately-held lot sizes, borders, easements, roadways, utilities, and the location of buildings.
4. Submit the Lot Split for Approval
Once the lot split has been determined, the plans to subdivide must be submitted to appropriate governing bodies, such as county and/or city engineers, for approval. Property owners should be prepared to make recommended adjustments to their plans before they are issued a Preliminary Lot Approval (PLA).
5. Market and Sell the New Lot
Once all conditions outlined in the PLA are met, new property lines, descriptions, and documentation can be created. The property owners should work with a legal advisor to file a lot split plat for the newly-subdivided property before marketing the lot for sale.
Subdividing excess land into new lots can be risky, but the process of selling or leasing unneeded space can be a lucrative means of dealing with unsupportive assets for CRE owners.
Learn More Strategies for Unsupportive CRE Assets
Corporate real estate optimization is fundamental to achieving your business goals and responding to new challenges. Learn more ways to address unsupportive assets in your CRE portfolio by downloading our free guide, Portfolio Optimization: The Essential Corporate Real Estate Guide.