Even savvy business people get hurt by the convoluted, unpredictable, costly, and sometimes unfair world of land development.
With proper planning and awareness of the challenges, here are some ways you can avoid the pitfalls and heartache of such a process.
For every winner that a developer can boast about and profit from, there are usually several that get caught-up in litigation for years, at an expense of millions of dollars. Many of these deals make marginal financial sense, yet provide a needed service, housing, or economic development opportunities for the community. . .
While no two deals, properties, or situations are ever the same in real estate, here are some things to consider when deciding to “take the plunge”, and also things to be aware of once the “go” decision has been made. Many of these are more specific to smaller deals and the “non-developer”, but many are also attributable to the larger owner/investor/developer as well:
- Understand your true needs: You’ll need to take stock in what you and your organization or operation truly need in terms of space, acreage, accessibility, geography, exposure, proximity to skilled workforce and other resources, etc. Pay attention to future expansion plans based on growth strategies. Only after you understand these elements can you communicate clearly with your broker, consultant, investors, capital resources, etc. If developing property for investment purposes, your goals are already likely in place—maximize property and get the best possible returns.
- Seek assistance as you source property for your program: Be careful when deciding which broker and real estate advisor to use, but even after that relationship is established, you can and should ask others you trust for advice on issues such as market conditions and trends, property values, likelihood of success to secure entitlements, local government intelligence, etc. Also make sure the site you’re considering meets your physical criteria, such as access, circulation, parking, loading, building location and orientation on site, and the ability to promote your brand and/or operation.
- Understand the challenges and constraints of a property you’re sourcing: . Know the property’s zoning designation, and how to interpret its implications for permitted uses, density, height, number of stories, parking requirements, etc. These things are not only public policy and matters of law, but also make sense for you… Who wants to build a new manufacturing facility next to a group of single-family homes, a high rise commercial building near a horse farm, or build homes next to a nuclear power plant?
Beyond zoning, you must also be aware of the local political climate and fervor, and assure that any “Not-In-My-Backyard (NIMBY)” issues are innocuous and easy to deal with. If a municipality clearly doesn’t want your development or project, even if the zoning is appropriate, sometimes it’s better to not even start down that path and select another location.
- Assess, Manage, and Mitigate Risk: When developing property or expanding a facility or operation, pay attention to the following general risk categories:
- Environmental Risk
- Market Risk
- Entitlement Risk
- Finance Risk
- Construction Risk
These can be daunting to the real estate neophyte, and downright dangerous if proper due-diligence isn’t undertaken. However, with the proper consultants, these risks can be understood, identified, quantified, and mitigation strategies can be implemented. Make sure these risks are understood before “hard money” deposits are released to a seller, as the costs associated with these risks are commonly grounds for negotiating purchase price.
- Understand the property’s value, and DON’T OVERPAY! There are a few methods to determine the fair price that you should be paying for property (sale or lease), but don’t be pressured to accept a price that doesn’t work for you. Chances are that if a price doesn’t pencil-out as you evaluate a deal, it won’t work for other interested parties either. Many times, a rejected offer comes back, and you might find yourself back in driver’s seat a month or two later, and at your number.
- Understand all documents you execute: Many savvy business owners, operators, and land developers can review documentation for “business terms”, but I recommend also having your attorney review for “legal terms”. This can include Purchase and Sale Agreements, Option Agreements, Partnership/Operating Agreements, Financial Agreements, Leases, Developer Agreements, etc.
- Understand available programs and grants that may apply: If developing property, there may be property tax incentives and other programs to help the deal’s financial profile, which can make an otherwise lean deal become more sensible. There are several grants and programs available for those looking to simply expand their business, based on your positive impact on the community and job creation/retention. The flip side to this is just as important. If you’re not vigilant, a town may impose unfair fees on your project, such as impact fees, off-site infrastructure improvement costs, and funds for affordable housing and others. Again, make sure you’re aware of these, and have your attorney review any documents that memorialize any negotiated impact costs.
- Hire the best team of consultants possible: There are numerous strategies to accomplish this goal, and some may have better results than others on a deal-by-deal basis. For instance, many think you should retain a local and “connected” land-use attorney to advance the project through Zoning and Site Plan Approval process. I agree in some cases but not others. If your project requires these types of land entitlements, it is imperative that you retain consultants that not only have experience in their specific disciplines, but their expertise must be specific to your project, your program, and with the types of entitlements required. These consultants are the land-use attorney, architect, civil engineer, professional planner, landscape architect, traffic/transportation consultant, environmental scientist, wetlands specialist, real estate valuation expert, market research specialist, and others based on specific needs of the deal. It’s also imperative to have a single “quarterback” run the process. For more experienced and savvy developers, this is usually someone in-house (or the principal him/herself). Sometimes it’s the attorney, and sometimes it appears that NOBODY is truly steering the ship.
These considerations are generic in nature, and should be combined with deal-specific strategies to get your project or development deal to the finish line.