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The purpose of this paper is to provide an individual searching for lakeshore with the ability to decipher property value, based on quantified and qualified research of recent lakeshore sales.

This paper analyzes a collection of over 250 different vacant lakeshore recent sales in Northern Minnesota and Northwest Wisconsin. The majority of this data was obtained by personal inspection, which was done between January 1999 and June 2000. This research differs from typical statistical model outcomes because it involves site aggregation, which defines sites as regions or counties where an averaging of characteristics of sites within the region or county serve as site characteristics, not estimation models. We break down each property into twenty different characteristics and evaluate these characteristics for their significance in determining keys to lakeshore value. In doing this research it became apparent that lakeshore valuation and development was broken down into two basic areas; environmental and real estate. Even though they are intrinsically linked, they can either gain strength from each other or be drastically opposing forces. Whatever the case, prior research tends to originate from the environmental area, while this paper originates from the real estate area because of the writer’s background. This paper will show that each is significant but will reach the same conclusion – that environmental and real estate issues both need to be researched and evaluated against a lakeshore’s property value and development plans.   Where personal inspection was not available, necessary data was used from local sources: (Department of Natural Resource Web Sites, and Multiple Listing Services throughout the Minneapolis/Saint Paul, Ottertail County, Arrowhead, Brainerd/Grand Rapids, and Northwestern Wisconsin areas).

Personal Background

I started in the lakeshore business in January 1989, one year after graduation from University of Wisconsin – Madison, where I received a Bachelors in Business Administration/Finance and took a couple of Real Estate courses. I had the desire to find something in the real estate field specializing in site selection. After becoming frustrated looking in the commercial real estate field, there was an opportunity, as an Acquisition Agent, to locate acreage properties in the Hinckley, Minnesota area for a firm specializing in rural land development. Today, that company is one of the premier lakeshore development companies in the Midwest with offices in Texas and Georgia. After a short time I started locating and purchasing lakeshore property in Northern Minnesota and Western Wisconsin. The position was responsible for locating and analyzing investment lakeshore property for investment and sale.

In February 1994, I was asked to join a company which was named, at that time, Johnson & Johnson Land Company, which has offices in Cumberland, Spooner and Turtle Lake, Wisconsin. The objective was to create a separate partnership that would exclusively develop lakeshore property. I was introduced to Johnson & Johnson’s twenty-plus year reputation in the brokerage/lakeshore business upon competing with them for larger lakeshore parcels. As a partner affiliated with one of the premier lakeshore development companies, my role of locating and analyzing properties expanded into more of a developer role and less of an investigator/investor. Even though I was still active in the acquisitions, my financial responsibilities and obligations dictated my involvement in the zoning, brokerage and infrastructure issues of lakeshore development.

Today, Johnson & Johnson Land Company has an affiliation with Coldwell Banker and continues to be a powerhouse in the lakeshore market. Because of expanded territory and the interests of using technological advances, it was decided to start a regional firm under separate ownership called LakeshoreDreams.com. We currently have lakeshore developments proceeding in each of the five regions we researched, with a new emphasis on commuter and Northwest Minnesota lakeshore markets. In summary, my experience in fifty-plus lakeshore developments in Minnesota and Wisconsin and involvement in the sale of over 500 lakeshore lots tells me that the market is no less dynamic than it was over ten years ago. Personal interests encourage me to further study Real Estate and the lakeshore development business. I am proceeding to obtain my MBA in Real Estate at St. Cloud State University. Dr. Steven P. Mooney, Professor and Holder of Minnesota Chair in Real Estate at SCSU, has graciously encouraged and advised this research.

Research Purpose

The researcher’s background has been almost exclusively with the development and sale of vacant lakeshore properties for the past eleven years. In that time period it has become evident that the demand for lakeshore property is an increasingly significant investment in the Midwestern economy for baby boomers that greatly influences lifestyle changes. He is interested in having the ability to categorically decipher what spurred significant value to buyers beginning their search in the lakeshore market. The objective of the research is to illustrate patterns of buyers’ behavior based on actual sales and a purchaser’s motivations. Research was done that would quantify lakeshore buyers’ activities in more of a regional aspect to their buying practices. Based on buyers’ performance, the research showed significant amenities that were generally sought in their lakeshore purchase.  

The nature of the research using site aggregation promotes subjectiveness, which is necessary to reach logical results. Anyone who chooses to venture into the world of lakeshore exploration needs to consider the value to a lakeshore buyer.

It was found that what is perceived as a buyer’s perfect lakeshore “community” of desired elements is as varied as a car purchase is to an individual. Every car has the basic engine, tires, doors, etc. In the same way, a lake has water and a shoreline; however, it is the style and performance that provide the element of value to lakeshore. The elements of lakeshores consist of amenities such as: the feel, the look, the social status, the comfort, the quietness, its functional uses, etc. These characteristics determine personal value. In researching all these elements, there are obvious limitations to what can be quantified and/or qualified. The physical characteristics of a lake or the property are fairly straightforward. However, to quantify or qualify a person’s feelings, or an uncomfortable local township or county’s restrictive zoning controls, is limited for our research analysis. One could expand on our research with personal interviews of public officials and individual lakeshore buyers to better qualify restrictions, motivations and feelings in their purchase. The research, however, may not ever produce plausible outcomes or values to show patterns. Taking into consideration a lakeshore’s characteristics with the objective of producing quantified research that will be valuable to an individual, one needs to investigate prior research.

Use of Prior Research

Using previous research to enhance this paper is difficult because the topic of lakeshore development is not well researched. Also, extrapolation of similar research that supports our research is limited. This is primarily due to the fact that most research includes improvements, less current market value trends, non-local zoning issues or scientific data used for classification of lake uses.

Upon locating research on lakeshore development a national negative reaction was found because of the protective interests of the general public. This is the basis for what would be the environmental areas of lakeshore evaluation. The author is currently working on a single lakeshore lot, in Northwestern Wisconsin, that was originally part of a farmstead that has a small portion of its land on a lake. The lakeshore portion of the property was clearly defined from the majority of the land because of a county road that separates the home and farmland from the lakeshore parcel. The total lot size is 1.5 acres and has approximately ninety feet on the lake. When the road was built to separate the lakeshore parcel it was satisfactory to build given the current zoning. In fact, the neighbor to the north has a similar property and built a small cabin on it. Since that time, county zoning has increased it setback restrictions and become more restrictive on its land use and lakeshore development. Today, after being turned down from a zoning change from Agricultural to Residential and an increase in other lakeshore setbacks, the property is considered unbuildable, possibly even for a ten by twelve foot storage shed. This example illustrates a point when environmental perspectives clash with real estate interests. 

Lakeshore developments are highly controversial.   There is a common phrase in the lakeshore development business known as “NIMBY,” which implies a new lakeshore neighbor/owner may “Not” be welcome “In My Back Yard.” This attitude is generally the case with an individual who wants to protect others from encroaching into their “backyard” – or in this case lake. As in all developments there are issues concerning zoning and the environment, especially the environmental issues that seem to follow lakeshore development. Lakeshore development is a sub-market niche of general real estate development; however, the below explanation seems to accurately explain why it will remain a specialty niche, along with the fact that it is a limited resource. Dr. Kerry D. Vandell, professor and chairman of the Department of Real Estate at the University of Wisconsin-Madison, the top rated mid-western Real Estate school, provides an interesting explanation of what a general real estate developer has to evaluate and how to react to it. He states:

Real estate development to the developer is sometimes considered the very antithesis of a process of lending itself to academic analysis. It has been called `seat of the pants,` requiring decision making within an environment of high risk and little information, of valuing the ability to `control` the process and to make maximum use of interpersonal relationships (with lenders land use officials and investors and so on) possibly more than good market and feasibility analysis. ⁷

The lakeshore developer has to understand the risk of evaluating the impacts of their development to the lake, the ecosystem, the neighborhood and how it will fit with the rest of the surrounding area.

Other research, specifically Benson, Hanson et.al. 1998, tried to quantify the value of lakeshore versus a standard view in the state of Washington. It appears there are major shortcomings to this research because of the difficulty in qualifying the value of lakeshore property with a lake home versus the value of vacant lakeshore property.

According to Bruce H. Smith 1993, research shows lakeshore development pressures produce a reaction of public interests through zoning controls and public acquisitions. Smith uses a larger lakeshore development to show the impacts of these types of zoning controls and acquisitions for the city of Chicago. Some of Chicago's most prized assets are its twenty-six miles of waterfront in over 2,500 acres of publicly controlled parks. Conscious foresight produced a valuable asset for Chicago. Many notable studies have been done on the city of Chicago for the economic value of its water amenities.⁸  To say the least, it is difficult to appraise the substantial value for these types of amenities. This research illustrated the positive impacts of zoning controls and public acquisitions. It can have a possible correlation to vacant rural lakeshore development.

Another illustration Dr. Vandell cites in his paper is how zoning enforcement effectively created a moratorium on California coast development in 1972. It includes a study on the California coastal initiative in the area of Los Angeles County and the effect it had on housing prices.  It could be assumed by the theory of “supply and demand” that housing prices would escalate because the supply of new development properties had been stopped by a moratorium. Surprisingly, their study provided clear evidence that values for twenty-two months preceding the "moratorium" showed no significant difference in value versus those found after the moratorium. This is a good example of proper zoning. The results of this study provide interesting discussion on the effects of development restrictions. Vandell comments that the study "confirms prior expectations in terms of the direction of the impact of the coastal initiative and the efficiency of response of the real-estate market to an exogenous event. The magnitude of the impact is potentially useful to state and local governments contemplating the benefits and costs from similar development restrictions, and to developers and owners contemplating optimal investment strategies over the period of initiative introduction"⁷

Lakeshore is an amenity to any piece of land. In evaluating value it is best to start with the basic criteria of a land’s amenities. Phil Sarazen is an appraiser who bypassed the basics and erroneously appraised an amenity without taking into consideration its zoning controls.  In The Appraisal of Real Estate, 10th Edition, he states:

Land, legally defined to include everything attached to the land, constitutes real estate.  Appraisers study the value of the physical real estate and its accompanying ownership rights, recognizing that real estate exists within the context of our society as a whole. Because the potential uses of the land are influenced by geographic legal, social, and economic factors, these considerations formed the background against which appraisal activities are conducted.

In his 1995 paper, Sarazen describes an appraisal (on a property with a value of $1.2 million) for a client for whom he had done previous appraisal work. He explains that the appraisal was done with the assumption that the developers expected the property would be used to its highest and best use, and that any permits and zoning changes could be made relative to its use.

Sarazen then goes on to criticize the previous appraiser's work by stating he did not bother to interview city officials or other groups that could delay or deny the development. This land was located in a city that had a number of development restrictions. Restrictions were imposed because of designated wetland areas, sloping, filled areas, protected bird species and limited access. An interview with a city official who was considered pro-development said the city did not want to be exposed to potential lawsuits from environmental groups and the outcry of voters in surrounding areas. Sarazen states:

While some of these geographical factors could have been mitigated by proper engineering, and the legal factors may have been able to be overturned by developing a better relationship with city council members, and while that economic factors could be shown to demonstrate financial feasibility, the social factors were formidable and precluded the other factors. The environmental groups were entrenched in their position in were determined to delay or deny any development on the site. One week later I delivered my final report to the client with a final estimated value of $400,000.⁴ 

Many discussions could be expanded on the difference of $800,000. However, the main point is not money lost, but the decreased value of the property’s use based on zoning and environmental restrictions. This is a prime example of improper zoning and the use of political influences to control them.

Foresight provided by the Federal Government mandated states to classify their lakes according to certain eutrophic conditions. In 1972, as an amendment to the Water Quality Act, specifically Section 314(A) states:

Each state shall prepare or establish and submit to the Administration for his approval:  An indentification and classification according to eutrophic condition of all publicly owned fresh water lakes in such state; Procedures, processes and methods (including land use requirements) to control sources of pollution of such lake; and Methods and procedures, in conjunction with appropriate Federal agencies, to restore quality of such lakes.

Primarily a push by the Feds to properly evaluate and manage lakeshore resources from a pollution awareness and protectionist angle, they sought to classify lakes according to their intrinsic value. A June 1975 report by U.W. Madison under the sponsorship of the U.S. Environmental Protection Agency (EPA) was done to classify more than 1,100 Wisconsin lakes. The report “Lake Classification – A Trophic Characterization of Wisconsin Lakes,” authored by Paul D. Uttormark and J. Peter Wall, part of the Water Resource Center of the University of Wisconsin-Madison, found in developing a lake classification they needed to be less chemical and biologically specific in their data research and more subjective and flexible. Their research showed that less scientific data did not impact their results negatively. Specifically, information regarding specific conditions and alkalinity was included in trial computations of LCI values, but these parameters were subsequently omitted when it was determined that they had very little if any effect on results. They developed a Lake Condition Index (LCI) using four parameters with a range of possible penalty points assigned to each parameter. The sum of the penalty points assigned in each category would be the Lake Condition Index.

Point System for LCI

Each lake was given penalty points relating to the four parameters. The total points, zero being the best, were calculated for 1,100 Wisconsin lakes. These 1,100 lakes are close to all the lakes considered to be for general recreational use (100 acres or more in size). 

Each parameter was measured from data collected from each county’s DNR Resource Manager. Dissolved Oxygen and Fish Kills were dependent on oxygen levels a lake sustains. Less oxygen would produce less life and is thus relational to fish population and lake health. Transparency is the lake clarity measured primarily in Secchi Disc by lake associations or area lake stewards on a voluntary basis. Use Impairment was the opinion of DNR managers relating to weed growth and if the lake was subject to heavy blooms.

Research was compiled from a questionnaire sent to the DNR representatives. The grant compensated them for their work. Interesting comments from the questionnaire produced insightful thoughts on the use impairment parameter. Others felt the use impairment parameter was too subjective as it is presently phrased. These managers said, “The wide range of individual interest clouded the value of this particular bit of information.”

Along with these privacy issues, he mentions “use frequency” concerns, public land holdings, along with spacing requirements should give a more accurate shoreline development density parameter to estimate a lakes’ “recreational carry capacity.”

His conclusion, based on 1975 research, was that “most Wisconsin lakes are developed to the point that additional recreational development could place stress on user and, possibly, on the resource itself.”  It is obviously easy to look back 25 years and predict the impact these pressures given the limits of lakeshore shoreline and population pushes. However, what is useful and fascinating is how this research parallels ours. Even though the data originated from different sources, Uttormark looks at classification using a protectionist researching approach. Using scientific data of the Uttormark report for primarily water quality results, the report found in the end that lake classification needs to be more subjective and look more at real estate needs for its value in research.

Application

First we established the critical parameters for twenty site characteristics for our market analysis of 253 lakeshore lots. The parameters were subjectively chosen based on the author’s personal experience with lakeshore buyers’ purchasing habits. These parameters are worthy reflections of a buyer’s purchasing decisions; however, they cannot be considered comprehensive. Using a standard correlation analysis, applied to 253 properties, we looked at the correlation between sale price and each of the twenty site characteristics. Sale price was used as the dependent variable against the independent variables of the lakeshore lot’s front frontage, acreage, distance from town, wooded, elevation, financing, water clarity, lake size, beach and region, etc. to illustrate their correlation significance. Basically, we want to see what the buyer was willing to pay for and approximately, in percentage terms, the amount they allowed for that amenity. 

The characteristics described in the following categories are the comprehensive physical aspects of each of the 253 lakeshore parcels. An average lakeshore lot’s front footage varied widely from a fifty-foot lot to approximately 1300 feet of lakeshore. However, the typical lakeshore front footage was measured between 100 and 250 feet. Taking the sale price divided by the amount of front footage provides the lakefront per front foot price. This calculation, generally used by most appraisers, provides a good benchmark when taking a limited number of comparables to determine lakeshore value.   Acreage is directly related to the lakeshore lot’s frontage. The range of acreage on the lake is from 1/3 of an acre to about fifty acres with the majority of lakeshore lots falling into ¾ to 1.5 acre lake lots. The larger acreages are rare because of availability and affordability. These larger parcels are sought out by developers and generally had the largest lakeshore footage. If the number of these parcels was larger in our database it may have skewed our results. Special attention was used to evaluate the impact of these parcels on our study and monitored to not skew our results. Distance from Town is defined as a lakeshore parcel that is greater or less than ten miles from a major city that has medical and emergency facilities. Correspondingly, the measured Distance to Twin Cities is hours. Clarity of the lake was gathered from Department of Natural Resources (DNR) information. The clarity measurement, sometimes referred to as the Secchi Disk Reading, is generally obtained by the DNR from volunteers. These volunteers monitor their lakes on a seasonal basis. They use a black and white circular disk, which is dropped into the water to a level that it becomes unclear which then provides the clarity measurement. Wooded is difficult to classify because there are individuals wanting the privacy of the deep woods and those that are looking for a nice apple tree in the front yard. Each could be considered wooded but hard to put in “yes” or “no” classification. For the database we used a small number of trees as being wooded. Lake size and Lake depth were gathered from information supplied by the DNR. Beach was classified into three separate categories: sand/gravel, rock, and muck. These categories adequately cover the majority of the type of beaches; however, there is always the extreme sand beach that could equate to Waikiki, Hawaii, and the extreme muck, which would not allow for boat access or possibly dock access. Extremes in cases like these are always difficult to assess. Shape is primarily used to make sure a lakeshore property is equally compared to other properties on a per front cost basis. The goal is to determine if the property is located on a peninsula or not. There is added value when purchasing a peninsula, however not equally on a per-front-cost basis in most cases. Financing looks at the difference between a seller having to finance the property for a buyer or bank financing, considered the same as cash. It is perceived that a seller who finances his lakeshore property receives more money in terms of nominal dollars.