Wednesday, October 27, 2010

The Legendary $1,000,000 Sale

Recently, a friend of mine, Pamela Treacy, brokered the sale of 1 3/4 acres of commercial property on Kingston Pike just west of Cedar Bluff to Gordon Food Service (GFS). The sale was reported in the newspaper. Omitted from the article was the fact that GFS paid $1,000,000 per acre for their site.

There have been other sales of a million dollars per acre - the site just west at Peters Road and Kingston Pike where Walgreens is located comes immediately to mind - but, in this time of reduced sales and lower prices, this transaction certainly raised some eyebrows. It is also a wonderful starting point for a number of conversations about real estate and its value.

Let's talk about fungibility. Everyone has heard the old expression that land is valuable because "they ain't making any more." Those of you who have driven across West Texas, New Mexico,  Arizona, or from Nashville to Memphis for that matter, know that they may have quit making it, but the current need seems to have been adequately satisfied. What is in short supply is the "McDonald's Corner." Feel free to substitute "bank corner" or "national drugstore chain corner" or "gas station corner." These are the 100% can't miss retail locations in heavily trafficked areas at signalized intersections. Companies will pay large sums of money for them. That's where non-fungibility is important. A commodity is fungible if it is interchangeable with any other unit of the same commodity. A barrel of oil or an ingot of gold is fungible because it can be exchanged freely with any other barrel or ingot. Real estate is non-fungible, and values are set based on the fact that no two pieces of property are interchangeable. One property may be worth $1,000,000 per acre because of its location, zoning, accessibility, usability, traffic count etc. It is doubtful that the property located a three iron away enjoys the exact same valuation. It could be more or less valuable based on the variations in the metrics.

 At the intersection of Peters Road and Cedar Bluff there is an Applebee's on one corner, Puleo's on another, a vacant bank building (soon to be Smart Bank) on the third and undeveloped land on the last. Why is there a vacant lot at the southwest corner of this intersection? Simply because traffic queuing at the stoplight in order to enter I-40 East backs up beyond the property boundaries making it very difficult and time consuming to access the site from Peters Road (Parkside) which currently is the only entrance point into the site. Functionally, the site is not as usable as the other three even though the location is identical. Would you trade the northwest corner (pre-development) for the southwest?

I happen to really like my house. I live across the street from a park, and I am close to work and a really good grocery. It is a small house, but it suits me.  I would not have bought this house if it were moved two miles in any direction. That is the lesson of non-fungibility.

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