Land Speculation - Early Game

General discussions and Technical Support for Capitalism II.
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infoscott
Level 3 user
Posts: 64
Joined: Fri Mar 06, 2015 11:04 pm

Land Speculation - Early Game

Post by infoscott »

At the beginning of the game, when investment capital is very tight, a strategy to invest in downtown real estate may seem counter-intuitive. With firms like R&D and farms, you have to locate somewhere, and the conventional wisdom is to locate in the suburbs in order to keep land costs down. In many cases you may also be closer to input sources and can thereby reduce your freight costs. All well and good, but I tried a counter example to this model, based on real life instances, and so far it has paid off very well in game!

The real world example. When Southern California was still expanding, some landholders would turn there land tracts into farms, or keep orange groves in place and harvest oranges when much of the surrounding lab was being developed for high value residential and commercial. Many of our peppers and strawberries were coming from these odd farms, some of which were being sold to discounters like Aldi. Clearly the farms weren't making a lot of profit, nor was the land being put to its fullest potential. The landholders were just trying to break even on these plots near the CBD. The trick was that farmland was taxed at the agricultural rate, not residential or commercial, and so the tax savings was really the big payoff. When the developers felt the real estate was ready for maximizing its profit, the farming equipment was removed and buildings put up.

The Capitalism Lab example. I have begun putting my first medium farms and R&D centers near the CBD in smaller cities, usually around 1.8 million population. The factories and warehouses I still put in the suburbs where the land is cheap. If this means at the very beginning of the game I have take out a loan to cover the land value premium, I have no problem with that. A couple of interesting things happen to the income statement and balance sheet that make carrying a large real estate investment bearable.

First, it looks like land is held on the balance sheet "marked to market". Unlike real world accounting, the market value of the property is realized every month. It shows up as a form of "profit", offset by the interest expense needed to carry the property. It won't show up in your dashboard at the bottom of the screen, as that profit is your cash profit only from operations. I believe your credit limit is also adjusted upwards by land value appreciation. So you're getting some of the benefits of commercial land holding without the need of a residential or commercial building on top of this land, or leaving it as bare land plots. Second, you are reserving the land space in a prime commercial location when it will not be available later in the game.

So you cash out later in the game when you have plenty of cash flow and borrowing power. You then relocate the farm or R&D next to your factories and warehouses, and then build commercial and residential on top of the old land (or retail if you're trying to build out a retail empire). In the end you will basically pay twice for the building itself, but you still keep the unit levels and the supply relationships of the firms themselves. The land appreciation you get from locating near the CBD is far greater and far more useful than appreciation in the suburbs from the beginning of the game. So in effect you are getting prime real estate at a huge discount, which everybody knows is how you play the real estate game anyway.

With the game set to inverse inflation, the benefit is greater and easier to see. Inverse inflation causes your cash balances to decline, but your loan balances also decline proportionally. As long as your loan balances average higher than your cash balances, you automatically gain from this drop in monetary purchasing power. But because asset/goods prices stay fixed relative to each other, any gain in land value is automatically inflation adjusted. So this strategy means you are carrying an appreciating asset with depreciating money.

In reality you wouldn't ever need to pay off the loan. Over time it shrinks to almost nothing, even if your business is stagnant. But usually you'll pay it off to reduce interest expense at the time you become flush with cash.

You see, those strawberry, pepper, and orange farmers in Orange County were brilliant!
counting
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Re: Land Speculation - Early Game

Post by counting »

This post is interesting and provide a viable strategy in early game. However it should be moved to Cap Lab strategy section, instead of Cap 2 discussion board.
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