Realtor Explains Arcadia Residential Land Investment
By Joe Taglieri
As the war of words over residential development in Arcadia steadily intensifies, members of the local real estate community have recently begun publicly speaking out about efforts to limit home size.
Throughout the last couple of months Joe Sira of Dilbeck Real Estate and a member of the Arcadia Association of Realtors have consistently attended City Council meetings to denounce a proposed voter initiative that seeks to revise design guidelines for single-family residences.
Last week another Arcadia-based real estate professional added his perspective to the debate. Like Sira, Eric Rosa foresees potentially dire consequences for stakeholders’ property values and real estate developers’ profit margins if the measure, which is still in the petition-gathering phase and not yet on the upcoming election’s ballot, becomes law.
“When you hear that big homes are hurting real estate values, and particularly in southwest Arcadia, it’s not true,” Rosa told the council at its Nov. 3 study session.
Referring to ballot measure supporters’ petition drive, Rosa added, “When we see people standing in front of the post office … you will never hear real economics, all it is ‘mansionization, mansionization.'”
In an interview Rosa presented a detailed set of economic data to augment his thoughts on the voter initiative and the city’s ongoing zoning code update process.
Rosa believes the measure’s petition effort will be successful in gathering the more than 3,000 signatures needed to qualify for the April 12 ballot.
He cautioned that if voters enact the proposed tougher limits on square footage, the policy revamp “can’t be overturned by elected officials” and would require a ballot initiative in 2018 to rescind voter-approved code amendments.
“The thing that concerns me about the referendum is how drastic and significant the proposed zoning ordinances are relative to what we have now,” Rosa said. “They could have anywhere near to a 35 to 50 percent decrease in teardown property values, and I think there will be ancillary reductions in other property values.”
To illustrate his point, Rosa – a 31-year Arcadia resident with a background in real estate finance who currently is a realtor at the local Coldwell Banker office – offered what he called a hypothetical “case study” examining the initiative’s potential impact on the realty market. Rosa’s bottom line: a nearly 50 percent decline in lot value if voters enact the proposed design guidelines for new homes.
Rosa used current building regulations to reflect the following scenario, which would result in a developer erecting an 8,200-square-foot, two-story home with a four-car garage, high-ceiling foyer and covered patios and porches on a 20,000-square-foot lot:
Land (20,000 square feet x $95) $1.9 million; construction costs (8,200 square feet x $200) $1.64 million; costs related to architecture and engineering (8,200 square feet x $20) $164,000; city and school fees (8,200 square feet x $8.25 + $1,000) $68,650; building contingency, legal and miscellaneous costs (8,200 square feet x $7.50) $61,500; bank financing interest $90,000; total cost about $3.9 million.
Rosa then estimated the following for the newly built home’s sale proceeds and return on investment for the property owner:
Sale price (8,200 square feet x $625) approximately $5.1 million; sale expenses (6 percent for marketing, realtor commission, title transfer, miscellaneous) $307,500; net sale price about $4.8 million; construction project total cost about $3.9 million; Net profit $892,500 or 23 percent of project cost.
Rosa also created another scenario based on the voter initiative’s proposed building rules – 35 percent of lot coverage for the first 10,000 square feet of a lot and 15 percent for remaining square footage over the first 10,000, as well as total square footage reflecting space consumed by the garage, porches, patios and the hypothetical residence’s high-ceiling foyer, which counts for double the floor area’s square footage:
Land (20,000 square feet x $50) $1 million; construction costs (4,300 square feet x $200) $860,000; costs related to architecture and engineering (4,300 square feet x $20) $86,000; city and school fees (4,300 square feet x $8.25 + $1,000) $36,475; building contingency, legal and miscellaneous costs (4,300 square feet x $7.50) $32,250; bank financing interest $40,000; total cost about $2.1 million.
According to Rosa profit shrinks considerably as a result of the proposed code revision:
Sale price (4,300 square feet x $625) approximately $2.7 million; sale expenses (6 percent for marketing, realtor commission, title transfer, miscellaneous) $161,250; net sale price about $2.5 million; construction project total cost about $2.1 million; Net profit $471,250 or 23 percent of project cost.
Rosa acknowledged that his conservative hypothetical focuses on the most consistent elements of a real estate investment. Additional factors such as the amount of time it takes to complete a construction project then sell a new home affects the overall return on investment as does the proportion of an investor’s actual cash stake in a property versus the amount of financing provided by a bank.
Rosa’s model concludes that for both sets of development guidelines an investor’s “annual equity return” amounts to 36 percent based on a 15-month time frame with 50 percent leverage.
“Most developers wouldn’t use these numbers, they’d want more,” Rosa said. “The reason being is there’s so much risk involved. You put up a couple million bucks in this thing or even more and the market goes south, or you have a 9/11, or some recession goes off and the stock market blows up, or the Chinese decide not to come and buy your house and you know what? You’ve got a big liability, and that’s why everybody isn’t a developer.”
Citing data on new home sales from the industry-standard Multiple Listing Service, or MLS, Rosa reported that the average lot size in Arcadia was 17,098 feet, the average new home size was 6,628 square feet and the average new home sold for $3.9 million.
“Demand for new Arcadia homes appears strong and slightly greater than demand in 2014,” Rosa said, countering claims that “China’s recent economic malaise will result in a decreasing demand” for new homes in Arcadia.
Through Oct. 1 “MLS reported 55 new Arcadia … home sales. This sale pace/velocity is ahead of 2014’s pace,” Rosa added. “For all of 2014 MLS reported 58 new Arcadia … home sales” with a median sale price of $3.2 million and average $610 per square foot, an average size of 5,563 square feet on a 14,207-square-foot lot and lot coverage of 32 percent.