Property owners in Austin have experienced an incredible increase in their land values over the past 10+ years. The county assessor's office reflects this in the land value of the property taxes, and increasingly, residents in the central city see builders paying a very high price for homes that they are then demolishing to build new constructions. If a property is sold and the structure is torn down, that price is then considered the value of the land.
The Basics
Understanding the city code and how much square footage can be built on land is crucial to understanding the value of your property. When a structure is new, as a rule of thumb, the land is worth ⅓ of the total cost of the property. Said another way, if a builder can sell new construction for X, they will pay ⅓ X for the land.
When someone purchases a property, their CPA captures the value of the land at that point and depreciates the structure over a 28-year schedule on their tax return. The value of the structure approaches zero over time. In areas of historic homes, this math changes a bit, but if we pay attention to these basic principles, then we can learn how to price real estate.
How does the new land code affect the land values of property owners in Central Austin?
It is easier to show something logically when you use extremes.
Let's use the above ⅓ rule of thumb to analyze building a large high rise. If you can build a $50M building on a piece of land, then the land should be worth ⅓ $50M. The exact math breaks down, of course, with a high rise -- since the building costs differ due to differences in steel versus frame construction costs. Conceptually it is easy to see that someone would pay more for a piece of land if they can build a high-rise building on it.
If I can only build a $1,000,000 home on this same piece of land, then a developer would only pay ⅓ $1,000,000 for it. How much you can build on a piece of property directly impacts the market value of the land.
How the Code Has Changed
The majority of Austin's building code was created in the 1980s, with small changes over the years. The code in the 1980s disallowed triplex use in the city of Austin unless the building was on a piece of land zoned multifamily.
In October 2018, another significant change occurred when the maximum size of ADUs (accessory dwelling units) increased from 850 square feet to 1,100 square feet. At the time, we saw the beginning of the second-unit/ADU development in central Austin. Builders purchased a lot with one house on it and built a second back unit. Both the original unit and the back unit were then sold as condos. What is important to understand in this type of development is that neither party fully controls the piece of land, which is worth at least ⅓ of the value of the properties.
This increase allowed the building of two-bedroom homes for these second units, which made the ADU far more marketable to home buyers.
The next big attempt at change came with Code Next. Code Next attempted to upzone large portions of the city, making building 4-story apartments on many major thoroughfares easier. Code Next was tied up in court and never implemented.
Most recently, the H.O.M.E. ordinance phase 1 and 2 were passed, allowing three units in many areas previously zoned for a maximum of 2 units. In addition to allowing three units, an increase in FAR is also allowed if there are three units on the property, with a preservation bonus of additional FAR if a home over a certain age in preserved on the property.
How does this affect central Austin property owners?
Remember the example about the $50M building? Since the 80s, in Austin, you have been allowed to build 40% FAR (floor-to-area ratio) on a single-family zoned lot. If you had a 10,000 sq ft piece of land, you could build 4,000 sq ft in air-conditioned space. With an increase in FAR, the value of the land also increases. Remember the high-rise example?
If I can build a 40-story building on a 1-acre piece of land, the land is worth more than if I can only build a 1-story building. This increase in FAR is very important to understanding land values in central Austin.
In addition to the increased entitlements *potentially increasing the value of land, another portion of the code, the Equitable Transit-Oriented Development, rezoned certain lots within ½ miles of the Phase 1 Austin Light Rail.
As the code changes, staying informed of how these changes will affect your property investments is critical.
*Why do I say this could potentially impact central Austin Landowners
As with any city ordinance, the city tweaks the rules and hopes that the market creates the intended effect. The City of Austin has upzoned many commercial areas and multi-family lots in areas like Hyde Park to create more density, but this doesn’t mean the density will increase overnight, and it doesn’t mean that 9-12 story buildings are even probable, even though they are possible. The market pricing demand for housing would have to be very high to support the construction costs of a 12-story building in Hyde Park.
Think of it this way: building a high-rise in Hyde Park costs the same amount of money as it does downtown. Downtown, a new condo's price per square foot is ~$1,000 per square foot. In 78751, a finished condo's price per square foot is close to $600/sq ft. If you were given the budget to build a 12-story building, where would you build it? You can sell it for a higher price per square foot, right?
The devil is in the details
In addition to the challenges of building multi-story buildings on smaller lots, other ordinances in place may prohibit the new rules from being implemented at all. In areas such as Hyde Park and Hancock, NCCDs are in place (Neighborhood Conservation Combining Districts) which are another municipal ordinance overlay.
Observing the various stakeholder groups in Austin, there is disagreement as to whether the NCCDs will block the ability to implement three by right. The builder groups believe that since the NCCDs do not address three units directly, they are not prohibited. People more closely involved with the development of the NCCDs believe that the NCCDs explicitly prohibit three units by not mentioning three units as an allowed use.
Deed restrictions in some neighborhoods prohibiting multi-family are seen as another barrier to implementing the three units by right in the H.O.M.E. ordinance. The deed restrictions are a patchwork of small and large areas of the city that tend to be smaller than a neighborhood but don’t follow any logical boundaries that make them predictable.
You must research deed restrictions and speak to an attorney about the development limitations of each area if the ability to build is important to you.
Historic Districts are another significant limiter to what can be built, impacting land values as a historic district has requirements that could limit the implementation of three by right as well as increased density allowances.
Why does all of this matter if you own real estate or if you plan on buying real estate
Understanding the various restrictions and how they work together is important to understanding the value of your property. If you have a small home on a large piece of land in Hyde Park, over 50% of your value may very well be in your land. It is important to understand the components of your property value if you are to price the property correctly for sale and not leave money on the table.
Likewise, correct pricing hinges on understanding land value if you purchase property. Additionally, it is important to understand the possibilities and probabilities of redevelopment near your property if it will impact your enjoyment of it.
We are delighted to be your guides to Austin and Austin real estate!
Cheers,
Jen & the team
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