Land Grab in Ipswich, Massachusetts: Little Neck's 32 acres

For several years now I've been following the story of a lovely, scenic 30-acre neck (almost-island) of land on a sheltered piece of the Atlantic Ocean about an hour's train ride north of Boston.  It currently contains 167 rented-out lots, of which 24 can be occupied year-round and the other 143 only seasonally. Half of the land is unoccupied, available to all tenants; the rest is subdivided into mostly small lots; all have panoramic water views, of varying quality.   The tenants own their cottages, most of which are in the 800 to 1000 square foot range, and typically 70 to 100 years old; a few are 2-story, newer or larger.  Asking prices run as high as $600,000, and I've seen few transactions below $300,000.  I estimate the cottages themselves to be worth about $75,000 anywhere else.   Currently annual land rent is in the range of $10,000, up considerably from many years of token rents, and many of the tenants are objecting to paying them, putting them into escrow  -- and, remarkably, planning to use the escrowed rent as a down payment to BUY the land!  (That brings a new meaning to chutzpah, which, you might recall, was exemplified by the man who killed his parents and then threw himself on the mercy of the court because he was an orphan!)

In 1650, the will of a resident, William Paine (Payne?), apparently gave the land to be managed for the benefit of the school(s) of Ipswich, via the provision that "unto the free scoole of Ipswitch the little neck of land at Ipswitch knowne as Jeferry's neck, the which is to be and remaine to the benefitt of the said scoole ... for ever as I have formerly intended and therefore for the sayd land not to be sould nor wasted".   It seems to me that his intent was pretty clear: keep the land forever ("not soulde"), take care of it, and collect market-level rents ("nor wasted") for the benefit of the beneficiary (the local school). 

And yet the trustees -- known as Feoffees -- have apparently entertained an offer from the current group of 167 tenants (calling themselves "The Little Neck Legal Action Committee!) to sell the land for a tiny fraction of its value, which I estimate could be as high as $71 million. (My calculations are 3 paragraphs below this one.)   The offer was in the range of $30 million, of which $6 million would go for paying off bonds on a wastewater system installed a few years ago.

There has been no effort to market the land to other possible buyers. 

Apparently this has become so troublesome that some in Ipswich want to sell the land to the tenants, figuring that a little income from the proceeds is better than no income from recalcitrant tenants!    Absolutely amazing.   Short sighted.   And it represents the privatization of an asset which was designed to provide a public benefit, forever.

Calculations:  When a cottage worth $75,000 sells for $300,000 or more, what is being sold is land value -- locational value.  But the tenants don't own the land, and I can't imagine a rational lender being willing to lend on an asset which the borrower doesn't own!  The current land rent of about $10,000 per year represents roughly $200,000 in land value per lot (5% capitalization or "20 years' purchase").  Add to that the $225,000 in land value in the $300,000 price for a $75,000 cottage, and you're looking at $425,000 in land value per cottage.  Multiply that by 167 and that's $70,975,000.  (The cottages would be another $13.4 million or so.)  Obviously, some locations are better than others, some lots are larger than others, and year-round rights are more valuable than only seasonal occupancy rights.   (You'll note that the $225,000 in land value in the $300,000 example is less than what 5 of the 6 current listings suggest.)

A. Current Little Neck listings at realtor.com and zillow.com [the latter added here on 11/15/10]: recall that all the sellers own is the building, not the land.  And that the cottage buyers should expect to pay $10,000 or more in land rent -- the current rate)

Table 1: Cottages for Sale on Little Neck, mid November, 2010
		--- Assessments ---						Ask as % Bldg*	Ask minus Bldg
Address	Ask	Bldg Value	Land Value	Total	Built	Descrip	Lot size
50 River Road	$599,000	$84,500	$347,800	$432,300 LY:  $383,400	1910	5BR, 1B, 1779 sq ft	3485	709%	$514,500
33 Bay Road	$585,000	$124,900	$178,200	$303,600 LY: $343,800	1930	3BR, 1B, 1318 sq ft	2614	468%	$460,100
35 Hilltop Road	$579,900	$88,400	$195,800	$284,200 LY: $268,500	1935	4BR, 1B, 852 sq ft	3040	656%	$491,500
24 Hilltop Road	$399,000	$107,100	$195,800	$303,000 LY: $287,300	1930	3BR, 1B, 1408 sq ft	3000	373%	$291,900
6 Plum Sound Rd	$375,000	$106,600	$222,800	$329,400 LY: $323,200	1920	3BR, 1B, 1160 sq ft	3049	352%	$268,400
23 Bay Road	$259,900	$64,200	$222,800	$287,000 LY: $285,800	1910	2BR, 1B, 800 sq ft	3049	405%	$195,700
average	$466,300	$95,950	$227,200		1922			485%	$370,350
5% of LV **			$11,360						$18,518
*Asking price as percent of assessed building value ** Land rent at 5%, a/k/a "20 years' purchase" Note that $11,360 is somewhat higher than the current land rent of $9,700 (seasonal) and $10,800 (year-round), suggesting that those rents are low vis a vis the assessed land value.   The $18,518 in the final column suggests that current rents, based on these 6 asking prices, should be 80% more than what is now being charged , assuming that the building valuations are reasonably accurate. Sources: realtor.com (viewed 11/14/2010) supplemented by zillow.com and assessor's database (viewed 11/15/10)

Observations:

1. The sellers are asking prices which are well above not just the assessor's valuation of the building itself, but also above the value of the land plus the building!  Compare this to the asking prices on other homes in Ipswich with less than 1800 square feet, and with 1 or 2 bathrooms (below).   And this is under the condition of annual land rent of about $10,000.
2. The lowest-priced LN listing, at $259,900, has a building assessment of $64,200 and a land assessment of $222,800.  The difference between the asking price and the building assessment is $195,000. ($195,000 times 167 is $32,565,000.)     And this is under the condition of annual land rent of about $10,000.
3. The average difference between the ask and the building assessment is $370,350 .  Multiple that by 167 tenants, and one gets an aggregate land value of $61,850,000 -- and that's with the $10,000 land rent!! 
4. The building assessments average $95,950.   The land assessments average $227,200.  Multiply that $227,200 by 167, and the aggregate value of the LN land is $37,942,400.   And that's under the condition of a $10,000 annual land rent!
5. The asking prices average $466,300, 485% of the average building assessment!
6. It seems odd that the LNLAC is offering so little, and that the hired appraisers are valuing the land at such low figures.

B. Comparable cottages for sale in other parts of Ipswich (where the seller owns the land and is selling both land and house, so there is no land rent payment involved) suggest that most other sellers are asking much closer to the assessor's valuation (some higher, some lower, but typically within 20%, as compared to 385%!):

• $479,000:  975 sq ft, 3 BR, 1 bath, on .42 acre lot [35 Plover Hill Rd, built 1940; building assessment $102,900; land assessment $296,800; total assessment $399,700, down from $431,700 in 2009.] --- photos suggest views somewhat comparable to Little Neck's    Asking price as % of assessment: 120%
  
• $425,000: 1867 sq ft, 3 BR, 1 bath; on .97 acre lot [299 Linebrook Rd, built 1950; building assessment, $153,700; land assessment $228,800; total assessment $382,500, down from $401,200 in 2009.]  Asking price as % of assessment: 111%
• $339,900: 1216 sq ft, 3 BR, 1 bath, on .34 acre lot [5 James Rd, built 1962; building assessment $108,500; land assessment $185,500; total assessment $294,000, down from $317,100 in 2009.]
• $319,900: 1344 sq ft, 3 BR, 2 bath, on .25 acre lot [13 Poplar St, built 1948; building assessment $113,200; land assessment $245,200; total assessment $358,400, down from $402,000 in 2009.]
• $319,900: 1187 sq ft, 3 BR, 1 bath, on .08 acre lot [13 Peatfield Street, built 1900; building assessment $125,500; land assessment $148,500; total assessment $274,000, down from $293,400 in 2009.]
• $319,000: 1250 sq ft, 2 BR, 2 bath, on 7840 sq ft lot [3 Brownville Avenue, built 1910; building assessment $130,700; land assessment $174,300; total assessment $305,000, down from $332,300 in 2009.]
• $309,000: 1584 sq ft, 3 BR, 1 bath on 9149 sq ft lot [1 Heatherside Ln, built 1958; building assessment $111,900; land assessment $199,300; total assessment $311,200, down from $338,900 in 2009.]
• $265,000: 1100 sq ft; 3 BR, 2 bath on 9,583 sq ft lot [12 Washington Street, built 1900; building assessment $110,300; land assessment $177,100; total assessment $287,400, down from $301,100 in 2009.]
• $265,000: 1410 sq ft, 3 BR, 2 bath on 0.06 acre lot [4 6th Street, built 1910; building assessment $111,900; land assessment $125,600; total assessment $237,500, down from $253,300 in 2009.]
• $259,000: 932 sq ft, 3 BR, 2 bath on 9583 sq ft lot [8 Cleveland Avenue, built 1900; building assessment $105,600; land assessment $176,600; total assessment $282,200, down from $311,200 in 2009.]
• $224,999: 1632 sq ft, 3 BR, 1 bath on 0.07 acre [4 Highland Avenue, built 1907; building assessment $157,400; land assessment $195,000; total assessment $352,400, down from $389,700 in 2009.]
• $229,000: 668 sq ft, 2 BR, 1 bath on .27 acre lot [6 Cameron Avenue, built 1930; building assessment $42,200; land assessment $204,000, total assessment $246,200, down from $264,900 in 2009.]
• $169,900: 1019 sq ft 2BR, 1 bath on .40 acre lot [8 Winter Street, built 1920; building assessment $81,200; land assessment $189,400]

C. Some additional newer/larger homes on sites with good views:

• $1,150,000  on .36 acre lot [52 Skytop Rd, built 1992 on .36 acres: building assessment $328,000; land assessment $290,800; total assessment $618,800, down from $681,000 in 2009]
• $970,000: 2330 sq ft, 3 BR, 2 baths on .30 acre lot [28 North Ridge Road, built 1990; building assessment $211,800; land assessment $543,400; total assessment $755,200, up from $582,200 in 2009.] 
• $639,900: 1923 sq ft, 3 BR, 2 baths, on 7841 sq ft lot [114 North Ridge Road, built 2010, building assessment $160,800; land assessment $377,400, total assessment $538,200.  photos suggest views somewhat comparable to Little Neck's.   Asking price as % of assessment: 119%

D. Some recent sales, also from Realtor.com; notice that the transaction prices are generally pretty close to the assessor's valuations, which validates the assessments:

• $612,500 (May, 2010):  2309 sq ft, 2 BR, 2 baths, on .26 acre lot [24 Northridge Road, built 1940; building assessment $163,700; land assessment $534,200; total assessment $697,900, down from $753,800 in 2009.]
• $530,000 (Oct, 2010): 1410 sq ft, 2 BR, 2 baths, on .34 acre lot [59 Skytop Rd, built 1986; building assessment $204,600; land assessment, $288,000; total assessment $492,600, down from $533,700 in 2009.]
• $400,000 (Oct, 2010): 1500 sq ft, 2 BR, 2 baths, on 3.90 acre lot [76 Town Farm Road, built 1930; building assessment $96,400; land assessment, $300,600; total assessment $397,000, down from $471,500 in 2009.] 
• $379,900 (Sept, 2010): 1610 sq ft, 2 BR, 2 baths, on 2.32 acre lot [156 Topsfield Rd, built 1968; building assessment $154,600; land assessment $240,800; total assessment $395,400, down from $418,100 in 2009.]
• $360,000 (Sept, 2010)  1600 sq ft, 3 BR, 1 bath, on 1.00 acre lot [316 Linebrook Rd, built N/A; building assessment, $133,300; land assessment 230,900; total assessment $364,200, down from $391,500 in 2009.]
• $309,000 (Sept, 2010): 1894 sq ft, 3 BR, 1 bath, on .22 acre lot [12 Hodges Way, built 1964, building assessment, $143,500; land assessment, $168,000; total assessment $311,500, down from $332,300 in 2009.]
• $300,000 (June, 2010): 1626 sq ft, 3 BR, 1 bath, on .08 acre lot [2 Hovey Street, built 1880, building assessment $136,200; land assessment, $157,900; total assessment $294,100, down from $319,100 in 2009.]
• $290,000 (July 2010): 480 sq ft, 1 BR, 1 bath on .24 acre lot [16 Chattanooga Rd, built 1952; building assessment $49,700; land assessment $249,900; total assessment $299,600, down from $352,100 in 2009.]
• $279,000 (Oct 2010): 1092 sq ft, 3 BR, 1 bath, on .20 acre lot [2 Hodges Way, built 1959; building assessment $110,900; land assessment $166,500; total assessment $277,400, down from $300,400 in 2009.]
• $250,000 (July 2010): 1010 sq ft, 2 BR, 1 bath, on .14 acre lot [8 Currier Park, built 1935; building assessment $107,800; land assessment $161,400; total assessment $269,200, down from $281,100 in 2009.]
• $235,000 (June 2010): 912 sq ft, 3 BR, 1 bath, on .28 acre lot [27 Paradise Road, built 1970; building assessment $106,200; land assessment $180,700, total assessment $286,900, down from $315,200 in 2009.]
• $229,700 (Aug 2010): 720 sq ft, 1 BR, 2 baths, on .15 acre lot [3 Sawyer Street, built 1920; building assessment $75,400; land assessment $171,800; total assessment $247,200, down from $271,500 in 2009.]
• $209,000 (May, 2010): 1034 sq ft, 2 BR, 1 bath, on .09 acre lot [84 High Street, built 1860; building assessment $109,300; land assessment $167,600; total assessment $276,900, down from $290,000 in 2009.]
• $185,000 (Oct 2010): 1620 sq ft, 2 BR, 1 bath, on .29 acre lot [138 Linebrook Rd, built 1956; building assessment $145,400; land assessment $182,000; total assessment $327,400, down from $352,300 in 2009; note that Realtor.com values it at $286,997 as of 11/14/10]
• $170,000 (Aug 2010): 1182 sq ft, 3 BR, 1 bath, on .19 acre lot [3 Turkey Shore Road, built N/A; building assessment $104,000; land assessment $239,100; total assessment $343,100, down from $387,200 in 2009; note that Realtor.com values it at $302,124 as of 11/2/2010.]
• $160,000 (Aug, 2010): 1640 sq ft, 3 BR, 1 bath, on 1.04 acre lot [20 Lakeman's Lane, built 1948; building assessment $126,100; land assessment $283,500; total assessment $409,600, down from $449,900.  Realtor.com vales it at $420,520, as of 11/14/10]
• $160,000 (Oct 2010): 1386 sq ft, 5 BR, 1 bath, on .21 acre lot [8 5th Street, built 1910; building assessment, $118,000; land assessment $216,100; total assessment $334,100, down from $374,100 in 2009; realtor.com values it at $296,672 as of 11/4/10
• $120,000 (June 2010): 1386 sq ft, 3 BR, 2 baths, on .05 acre lot [2 5th Street, built 1910; building assessment $123,000; land assessment $97,700; total assessment $220,700, down from $237,900 in 2009;  realtor.com values it at $223,234 as of 11/2/10.]
• $80,000 (Aug 2010): 760 sq ft, 2 BR, 1 bath, on .18 acre lto [53 Jeffreys Neck Road, built 1943; building assessment $76,600; land assessment $174,000; total assessment $250,600, down from $276,900 in 2009; realtor.com values it at $227,594 as of 11/2/10.] 

(I suspect the last six of these might be situations where a co-heir to an estate bought out another heir, with the transaction price representing half of the value, but I can't be sure of that.)   Have any of the assessments been adjusted downwards in 2010 on the basis of the transaction price?  That might have been the case in a few situations(?)

If the landlords were collecting the full market rent on the Little Neck land, then the asking prices for the cottages on Little Neck would be in the range of 90% to 120% of the assessor's valuation of the buildings.

 

The tenants did not create -- could not possibly have created! -- any of the land value, despite what the "Little Neck Legal Action" committee asserts below.  The letter makes interesting, even humorous, reading, particularly in light of the fact that were there to be a sale, it would be the seller who would be paying off the debt on the wastewater system, not the buyers.  That wastewater system created some value, particularly if it ends up making it possible for more than 24 cottages to be used year-round.

Here are the various prices, divided by 167 current tenants and by 32 acres:

• $42,325,000 works out to $253,443 per average lot, or $1.3 million per acre (see letter, below).  Capitalized at 5%, an average land rent of $12,672, and aggregate annual gross rent to LN trustees of $2.116 million
• $31,500,000 works out to $188,623 per average lot, or $984,000 per acre (see letter, below). Capitalized at 5%, an average land rent of $9,431, and aggregate annual gross rent to LN trustees of $1.575 million.
• $10,000,000 works out to  $59,880 per average lot, or $305,000 per acre (see letter, below). Capitalized at 5%, an average land rent of $2,994, and aggregate annual gross rent to LN trustees of $500,000.  Compare $305,000/acre to the assessments on nearby land, particularly land with fine views and breezes; an acre is 43,560 square feet.
• $70,975,000 works out to $425,000 per average lot, or $2.2 million per acre (see my analysis, above). Capitalized at 5%, an average land rent of $21,250, and aggregate annual gross rent to LN trustees of $3.549 million.

(Compare those amounts per lot to the assessed values of the land, and then to the asking prices, above.  Did the assessor get it that wrong?  I suspect his LN land valuations are low.)

Here's the letter from the "Legal Action" committee to the local paper:

To the editor:

The School Committee’s recently released appraisal performed by Lincoln Property Company (“Lincoln”) establishes four things:

• It further discredits the Finance Committee’s continued assertion that the market value of Little Neck is $42.325 million. Lincoln states that Colliers Meredith & Grew’s (“CMG”) $42.325 Million estimate “is completely one-sided, ignoring that any value over … $10,000,000 is the result of a long term partnership between the Feoffee and the Tenants.” The Finance Committee’s claim was previously revealed to be without merit when the portion of the appraisal that the Finance Committee tried to hide from the public was released as a result of the Probate Court lifting a Protective Order. In their “supplemental letter”, CMG set the market value of Little Neck to a third party at $ 26.4 Million.
• In Lincoln’s view, the “fair value” of Little Neck may be as low as $20.5 Million. However, in summarizing the appraiser’s analysis of all relevant considerations, the appraiser specifically states the “market value of $31,500,000 … represents my opinion of the fair value of the property” to the homeowners in the specific “closed market transaction” contemplated here.
• The School Committee’s appraisal, completed in a more deliberate and professional manner than what the Finance Committee put forward, recognizes the significant value created by the tenant homeowners who have bought, built and/or improved their own homes. The Lincoln appraiser wrote, “Without the tenants’ improvements, the property would not contain the 167 grandfathered cottages and its value, according to CMG, would only be $10,000,000.” The appraiser clearly states that the tenant homeowners should not be compelled to pay twice for their part in creating the current value of Little Neck.
• The Lincoln appraisal offers further indisputable support for the $29,150,000 purchase price set forth in the settlement agreement between the Feoffees and the homeowners.

While the Little Neck Legal Action Committee (“LNLAC”) appreciates the good faith effort of the Lincoln appraisal, we believe that it does not appropriately take into account the potential adverse consequences to the School Committee of not affirmatively supporting the settlement agreement. The cost of not doing so includes:

• The direct cost of litigating the controversy in the Probate Court. At the Town Meeting in October, an additional $300,000 was authorized. If the Probate Court litigation is not resolved, the total cost to the School Committee will be dramatically higher.
• The Feoffees have already spent nearly $1 Million in legal fees on the presently stayed Superior Court class action litigation. If the settlement is not implemented and that litigation is reactivated, the four year history of no contributions by the Feoffees to the Schools will continue while the litigation drags on for many years to come.
• If the Homeowners prevail, the Feoffees may be ordered to pay many millions of dollars in damages, plus interest and attorney’s fees.
• Even if the Feoffees ultimately succeed in the Superior Court litigation, which LNLAC believes to be highly unlikely, they may still be compelled to pay the fair market value of each of the 167 homes on Little Neck of the tenants, which could easily exceed $16 Million.
• Under either scenario, the Feoffees would be unable to provide any funds to the Ipswich Public Schools for perhaps decades to come.

We believe that the settlement agreement is fair to all parties and that a rational review will bring all reasonable and clear minded parties to that conclusion. Should that not be the case, LNLAC is willing to allow the Probate Court to make the judgment as to whether the settlement agreement is, in light of all relevant circumstances, fair and reasonable. The School Committee is aware that the Feoffees have engaged LandVest and LNLAC has engaged Petersen/LaChance Realty Advisors to update their prior appraisals. At the end of the day, we anticipate that the Probate Court will conclude that the agreed upon figure of $29,150,000 is more than justified and supported by a careful review of the four appraisals at issue. We appreciate the deliberate approach taken by the School Committee and believe that responsible and professional analysis will be demonstrated by its members. We await the conclusion and closing of the settlement that will allow the School Committee and the school children for which it is responsible, to benefit from what we are advised will be the largest investment trust for any public school system in the commonwealth.

                                                         Mark DiSalvo and William Gottlieb

                                                         Little Neck Legal Action Committee

So what do you think?  Should the 2010 Ipswich citizens be in favor of selling this piece of land to the LNLAC at $29 million?  $40 million?  $70 million?  Or is this a priceless asset that ought to be kept, to serve its intended purpose for future generations of Ipswich students?  Should the Feoffees sell it, or simply collect, month in and month out, the market-value rent of the land?

Is there a statute of limitations on how long a public-spirited gift with growth potential should remain an asset for the benefit of the schools, or is the LNLAC arguing that the value of this gorgeous piece of land has peaked, to stagnate forever, and they're willing to accept the downside and the upside for a mere $30 million?

I just can't imagine how the discussion has ever gotten this far.  This asset was never to be sold.  And were the trustees to stop wasting it -- permitting tenants to remain without paying roughly market rent -- the schools would, as the donor intended, have a fine -- and growing -- income, forever.   "The largest investment trust for any school in the commonwealth" will provide a fine income to a lot of investment brokers and firms, but an inferior and declining income for the schools.  (Think about what the schools would have in 2010 if the trustees of, say, 1933, had sold Little Neck and invested the proceeds.  What do you think that fund would be worth now?  Remember the question: where are the customers' yachts?)    Keep the asset.  Collect the rent.  Repeat annually.

The alternative?  Sell it to the tenants now, and then watch some private equity or hedge fund swoop in and double the tenants' purchase price -- on a down payment made with escrowed rent! -- and then watch the investor hold the asset until the market improves and they can develop it. A win for the tenants, but what about the rest of Ipswich, and the intended beneficiaries?

Filed under "popular ignorance of land economics," "privatization," among other categories.  This blog has more observations and history on this story.  See them collected at  http://lvtfan.typepad.com/lvtfans_blog/feoffees-land/.