Parks Raise Revenue, Reduce Risks

This article first appeared in the PB October 2003 issue of Pro Builder.

Contact John Burns
via e-mail at jburns@realestateconsulting.com

The days of "back-of-the-envelope" land deals and "rule-of-thumb" land planning disappeared in the last decade, replaced by rigorous analysis with the goal of eking out every potential dime from very expensive dirt. Now, a new tool can help sharpen the point on your land-planning pencil still further.

Sophisticated analysis by Andrew Miller at the Massachusetts Institute of Technology's Center for Real Estate shows builders and developers how to redesign land plans to increase revenue and accelerate sales. Because 200-page master's theses make few regular reading lists, this column summarizes the findings. I suggest, however, that you purchase and read the $25 report, which is available from MIT by calling 617/253-4373.

The comprehensive analysis of land plans around 14 mature parks in the Dallas area studied the premiums associated with being adjacent or close to a neighborhood park. More than 3,200 home values were studied, and a geographic information systems program was used to calculate the walking distance from each home to the closest park. The study provides conclusions on the optimal park configuration, lot configuration and street layout.

Bill Gietema of Arcadia Realty, a land developer in Texas, sponsored the study and now practices the results - with tremendous success. Because the study's recommendations also show how a city can develop a higher property tax base and better mature neighborhoods, Gietema uses the study's results to convince cities to:

allow greater variety in lot sizes in exchange for more usable open space.
allow Arcadia Realty to plot more homes surrounding parks rather than have one side of the park face a major arterial, as in a customary land plan.
allow multiple small parks in place of a large, square park, resulting in higher lot premiums.

For example, Arcadia used the MIT study to show a city that its property tax base would be $22 million higher with a redesigned land plan around parks, compared with the initial concept following conventional subdivision design. This more diversified land plan results in faster absorption and higher lot premiums. Arcadia also has negotiated density bonuses because of the reconfigured open space. Subsequently, builders have charged more for homes because of the increased park access.

One of the study's most valuable results is the calculation of the premium that should be charged for having a view of the park, as well as the value of the premium as homes move away from the park. The study will not tell you the exact land plan and premiums for your community, but it will give you an excellent template to follow in conducting local market research.

Cost/Benefit Analysis
The decision to build a park is not made lightly. Builders must calculate the value of the park and the incremental costs. If the city mandates a park, the analysis becomes much simpler. Here is my guide for calculating the costs and benefits:

Benefits

View premiums from homes adjacent to the park

+ Use premiums for those within a reasonable walking distance

+ Lower financing costs because of faster absorption

+ The possibility of higher density

Total benefit

These benefits are hard to quantify, but a nominal data purchase plus analysis by a quantitative analyst is much easier to do today than it was several years ago.

Costs

Land cost

+ Lost profits from home construction (if the park cuts into unit count)

+ Incremental park construction costs

Total cost

In some areas, builders have determined that parks made good financial sense. If they make sense in your area, or if the city mandates a park, then construction and maintenance costs also need to be considered.

Multimillion-dollar decisions deserve rigorous analysis. Challenge your land planner to prove mathematically which is the most efficient land plan. Use the MIT study to show your local planning department how the city, its residents and the builder all can benefit from the optimal land plan.

And the Study Says...

1. Elongated, rectangular parks result in higher home prices than square parks do because more homes directly face the parks and more are a short walk from the parks.
2. The smallest lots should be close to the park because the premium paid as a percentage of home price is higher on smaller lots. One benefit to homeowners is lower landscaping and maintenance costs.
3. Homes should face the park. Such homes were valued 22% higher than those more than a half-mile from the park.
4. Narrower lots result in higher overall premiums because more homes benefit from being closer to the park. Put larger lots farther from the park.
5. Small, distributed parks produce more home pre-mium revenue than a large, consolidated park, although the extra construction and maintenance costs of smaller parks must be factored into the ultimate conclusion. Small, distributed parks bring more parks closer to more homes, which is part of the reason for the higher revenue.
6. Make the park a short walk to as many units as possible by maximizing street and pedestrian access. The park should be bounded on all four sides by a street, and a small walking path that perhaps bisects several blocks puts the park a shorter walking distance from more homes. Approximately 85% of a park’s premium occurs within 800 feet of the park’s edge — a three-minute walk for a child.
7. The park should be visible to neighborhood residents. This visibility enhances the community’s value.
8. Space parks throughout the community. While homeowners would like easy access to all parks, they likely will not pay twice the premium for twice the park access.
9. A park provides a community gathering place, which makes it easier for neighbors to meet. A park helps create a desirable community long after the last home is sold. The trick for the builder is to show buyers the park’s value while new homes are being sold.

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