Seriously. 35%? How the heck can anyone get 35% percent returns? That equates to about 14% per annum!
My savings account only pays 1.5%!
Property values aren’t going up at 14% per year!
Yup, that’s all true, but the fact is, these returns (and often higher) are typically what developers achieve on a regular basis. The key element to achieving high returns on a project is “rezoning”. You may have heard this term before but not understood what that can mean for a residential property.
A little about residential rezoning
There are a number of factors that go into the rezoning and the price of a property, but in short:
- “rezoning” gives property developers the ability to add more liveable square footage to the same lot of land.
- People generally buy housing based on square footage. A 3,000 sqft property sells for more than a 2,000 sqft property in the same neighbourhood Given similar lot sizes and building age.)
- Two lots of the same size and in similar locations can have different prices based on their zoning. Lots where you can build 3,000 sqft (Zone A) are worth more than lots limited to 2,000 sqft (Zone B).
In a nutshell, that’s it! The increase in square footage provides higher than average returns. Knowing that the value of the lot can instantly increase with a change in zoning, the city won’t just rezone out of the goodness of its heart, nor should it!
Of course, the city will want something in return. It might be:
- A payment/tax reflecting the change in value from the rezoning.
- Some public green space or common property must be developed for city residents to use.
- A portion of the new property must be used for affordable housing, or
- some other community benefit.
The Retention Of A Character House In An Rs Zone
In the case of the property located at 1956 East 13th, the City wants new developments to maintain the character of the neighbourhood. The homes in Grandview-Woodland area have a special character that the City and the local community want to retain. In return for ensuring a new development retains the character of these homes, developers may be granted the right to increase the amount of square footage that can be built on the lot — in essence, a rezoning!
With approval from the city, we can now renovate the property from a single detached home with one Parcel Identifier (each, a “PID”) into 3 separate strata units each having an individual PID with an additional 1,456 sqft on the property.
The current cost per buildable square is $478. With a development cost of $499/buildable square ft., we are estimating a sell price of $1,115/buildable square ft. So, pretax that’s a 35% return on equity.
You can learn more about IMBY and the 1956 East 13th property here.