Measuring the Cost of Holdout: Size and Sequencing in Land Assembly Yuming FuNational University of

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Measuring the Cost of Hold-out Size and
Sequencing in Land AssemblyYuming
Fu National University of SingaporeDan
McMillen University of Illinois at ChicagoTsur
Somerville University of British Columbia

• November 2004

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Hold-out Development A Primer

• Hold-out Market for Corporate Control - Grossman
  Hart (1980)
• Inefficient level of takeovers
• Firm currently trading _at_ share value VtX
• Raider believes she can raise to Vtn Xd
• Shareholders will not sell below XltEt(Vtn) Xd
• Positive free rider externality- sub-optimal
  level of takeovers
• Efficiency requires dilution of rights of
  non-sellers
• Land Assembly
• Inefficient assembly
• Optimal development size requires assembly of
  parcels
• Development profits rising in lot size
• Assembled lots more valuable than fragmented
  ownership
• Landowners want to share in development profit
• Dilution of rights forced sales

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What this Paper Does

• Measures Cost of Hold-out
• Whats the premium?
• Distribution of the development rents
• Developer vs. landowners
• Which landowners?
• Studies Sequencing of Assembly
• Simultaneous or sequenced assembly?
• What determines the sequence?
• Measures the Size Price Relationship
• Convex vs. concave shape

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Bottom Line Quickly Delivered

• Hold-out Cost Assembly Premium
• Last lot assembled 20 premium
• Assembled lots 14 premium
• Lots to be assembled -8-10 discount
• Premium falls as last lots share of assembled
  parcel grows
• Only last lot gets Hold-out premium
• Sequencing
• Minimize sharing of dev. profit lots w/ larger
  share of assembled size are more likely to be
  assembled last
• Maximize flexibility corner lots are assembled
  last
• PriceSize Relationship
• For very small urban lots, price/sf is rising in
  lot size
• Flattens out at 5,000 sf

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Why Development Hold-out?

• Contribution to Corporate Finance We Measure
  Hold-out
• Cleaner test than with equities
• Land is discrete
• Differentiate between hold-out and other factors
• Can address other issues
• Compare simultaneous vs. sequential acquisition
• Differentiate results by degree of Hold-out power
• Contribution to Urban
• Land Appraisal Measure parcel size
  relationship
• Urban Policy
• role of land assembly in determining urban form
• Assessing value of eminent domain reasonable?

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Hold-out Literature Corporate Finance

• Lots of Theory Papers
• Equities Empirical - Literature on
  Merger/Takeover Premiums
• Large 19-35 vary by on period (Jarrell,
  Brickely Nutter 1988)
• Sensitive to many factors ex payment method
  (Auerbach 1988)
• Does existence of premium proof of hold-out?
• Lit. doesnt differentiate hold-out from Nash
  bargaining allocation
• Differences in hold-out power among shareholders
  are not identified
• Techniques around free-riding
• What ownership gives corporate control?
• Super-majority powers
• Loss of liquidity for non-tendered offers reduces
  value of hold-out
• Empirical Bonds Literature on Default Workout
• Ex Chatterjee, Dhillon, Ramirez (1995)
• Coercion is effective in limiting hold-out
• No evidence of loss from being subject to
  coerceion

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Sequential BargainingRoom For Contribution

• Bargaining Literature Searching for Equilibrium
  / Coalitions
• Sequential repeated interaction w/ same
  partners
• Three-party games
• Corporate Finance
• Hold-out
• Staged offers because of rival bidders
• Toeholds to avoid hold-out -(Bulow, Huang
  Kemperer 1999, Betton Eckbo 2000)
• Mergers and Sequencing
• 1 buyer, 2 targets sequential vs. simultaneous
  (Linquest and Stennek 2001)
• 3 firms w/ synergies - merge/dont merge,
  simultaneous/sequential (Gomes 2004)
• Land Assembly Sequencing w/ Homogenous Lot Size
  Asami Teraki (1990)
• Order of interest spatial interior vs. corner
  number
• Nash outcome - prices are convex in assembly
  order
• Optimal assembly strategy is to maintain
  flexibility
• Price depends on ratio of developers lots (not
  sequential) - Asami (1988)
• Acquire interior lots first

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Hold-out LiteratureLand Assembly Redevelopment

• Theory Only No Empirical Work
• Urban Renewal - OFlaherty (1995) Denman
  (2000)
• Direct application of Grossman Hart
• Comparing market vs. eminent domain in rights
  dilution
• For identical lots, prices are equal
• Assembly w/ Landowner Heterogeneity - Eckart
  (1985) Strange (1995)
• Simultaneous bargaining assemble all lots or no
  assembly
• Equilibrium outcome
• Higher land price for small parcels - Lower
  opportunity cost of failure
• Land prices for assembly rise w/ number of lots
  to assemble

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Plottage vs PlattageSize-Value Relationship

• Plottage - Land price increases w/ size
• Scale economies in land-use construction
  efficiency
• Urban Issue
• Plattage- Land price decreases w/ size
• Diminishing marginal value of area.
• Suburban issue
• Empirical Results
• Analysis of suburban lots - mainly Colwell
  large earlier appraisal literature)
• Colwell Sirmans (1983) find concavity
• Thorsnes McMillen (1998) Semi parametric
  estimation find concavity
• Colwell Munneke (1999) Use Chicago urban lots
  still concave
• Mean Lot size 282,000 sf
• Mean distance to CBD 16.6 miles
• Only 30 in Chicago city limits
• What land is vacant in Chicago core?

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Tests Hypotheses

• Is there a Hold-out premium?
• Distribution of premium among landowners
• Equal?
• Unequal
• Convex in assembly order?
• Greater Premium for smaller lots / smaller share?
• Price- lot size relationship
• Sequencing
• Large lots first lower opportunity cost of
  assembly failure
• Small lots minimize Hold-out risk to
  development profits
• Corner lots last minimize hod-out risk

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Land Transaction Data

• Hong Kong in built-up urban areas (HK Island
  Kowloon)
• active redevelopment activities during our sample
  period from 1991 to 1998
• 715 parcel sales usable for analysis, 412 w/
  assembly
• Deflated w/ property type specific price indexes
• Identification of land value from building
  transactions
• Only lots that subsequently redevelop
• their prices would equal the price of the parcel
  net of demolition cost (see Helsley Rosenthal
  1994)
• Take into account estimated cash flow until
  redevelopment
• Control for use, max. allowed floor area, time
  until development
• Sub-set where we know size of existing building

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Table 1 - Summary Statistics
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Empirical Methodology

• Two Estimation Approaches
• OLS w/ fixed effects dummies
• Semi-parametric w/ location lot size
  non-parametric
• Semi-parametric techniques
• Examples (Stock, 1991, Pace 1995, Anglin Gencay
  1996, Thorsnes McMillen 1998)
• We use Robinsons (1988) two-stage methodology
• lnyi Xi? f(zi) ui
• E(lnyi zi), residual ey E(Xi zi), residual ex
• Locally weighted regression (Cleveland Devlin
  1988)
• Regress ey on ex to estimate ?

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Table 2 Log ( per Sq Ft)
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Figure 1Lot Size Price per Square Foot
RelationshipSemi-Parametric Estimates Cardinal
Ordering
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Figure 2 Lot Size Price per Square Foot
RelationshipSemi-Parametric Estimates Ordinal
Ordering
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Table 3 Log ( per Buildable Sq. Ft.)
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Figure 3 Lot Size Price per Buildable Square
Foot Relationship Semi Parametric Estimates-
Cardinal Ordering
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Figure 4Lot Size Price per Buildable Square
Foot RelationshipSemi-Parametric Estimates
Ordinal Ordering
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Why Convex Relationship (Plottage) Is Not
Commonly Observed in Empirical Studies?

• Not the right data
• Use suburban large lots
• When used urban lots are weird
• Identification can be challenging
• Construction costs falling in lot size yields
  convexity
• Hold-out potential for smaller parcels will
  inflate their relative price
• Decreasing convexity / increasing concavity

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Table 4 Sequential Assembly
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Concluding Remarks

• On assembly
• Hold-out premium exists
• Last lot groups of assembled lots only
• Greater for smaller lots (by share of eventual
  assembly size)
• Price-size relationship
• Suspect driven by construction costs
• Hold-out can work both directions
• Sequencing
• Matters for land assembly
• Strategic
• Implications for policy
• Land assembly creates value
• Holdup can discourage land assembly