Land Acquisition & Due Diligence

 

Land Acquisition & Due Diligence – buying land for real estate development purposes will become more difficult, complex, and risky for residential and non-residential developers.

There have been many changes in buying and assessing land for development purposes.  Most of the recent changes are due to the great recession and lending practices. It hasn’t always been this way and over the past four decades, our approach to buying land remains about the same EXCEPT for governments influence:

“Buy land in the best location at below market prices and rezone for value”

The knocking on doors and asking the land owner to sell still may happen but most likely, the land owner will know more about the market price for their land than you! Unfortunately, they will think their property is always worth more than it is from a development point of view. In this case it is their estate that will sell the land!

The information found on the internet is remarkable and an internet property search before walking the property can save you a lot of time and effort.  Land acquisition is a local /regional enterprise with its own unique land evaluation approach because of land form and characteristics. But the approach to assess land for development potential remains the same. I am posting my due diligence checklist for your use. In previous blog posts, I have explained each task. Please add your tasks to this list or delete tasks to make this checklist specific to you. The due diligence period is part of the land acquisition process and “kicking the tires” take time, effort and financial risk.   

 

Due Diligence Checklist

GENERAL

                        ·         Property Description and Ownership

·         Tax Map and Parcel Size

·         Master Plan Compliance

·         Future Road Alignments & Right-of-Way Dedications

·         Review of Phase I Environmental Study, if available

·         Walk the Site & Pictures 
 

MAPS & PLANS

·         Property Boundary Survey

·         Tax Map

·         Zoning Map

·         Master Plans

·         Street Map and Community Amenities

·         Topographic Survey or GIS

·         Aerial Photo

·         Soils

·         Water and Sewer Maps

·         Wetland Inventory Maps

·         Flood Plain Maps

·         Road Network Plan 
 

ZONING & LAND USES

·         Zoning Designation

·         Permitted and Conditional Uses

·         Zoning Restrictions, Bulk Requirements, and Constraints

·         Density Bonus

·         Yield Analysis, Open Space and Buffer Requirements 
 

REGULATORY

·         Current Rezoning Applications

·         Development Impact on Services & Existing Infrastructure

·         Dedications, Easements and Encroachments

·         Road Access, Offsite Road Improvements & Onsite Road Circulation

·         Land Development Regulations

·         Stormwater Management Facility Requirements

·         Best Management Practices

·         Entitlement, Approval and Permitting Process 
 

NEIGHBORING PROPERTY

·         Existing and Proposed Uses

·         Positive and Negative Surrounding Property Analysis

·         Neighborhood Reaction to Development Plans

·         Political Assessment 
 

SITE CHARACTERISTICS

·         Flood Plains

·         Environmental Constraints

·         Wetlands, Ponds and Jurisdictional Streams

·         SWIM Buffers, Natural Buffers

·         Property Soil Types and Characteristics impacting development potential

·         Water Table

·         Topography and Slope Analysis

·         Drainage Patterns, Conveyance and Site Characteristics

·         Water Line and Fire Hydrant Location, Water Pressure, and Availability

·         Sewer Line Location and Invert Elevations, Line and Plant Capacity

·         Other Utility Availability i.e. gas, electric, telephone, fiber optics

·         Frontage Road Classification, Condition and Sight Distance

·         Property Configuration Impacting Development

·         Connection to Adjacent Properties (Connectivity)

·         Soil Erosion and Sedimentation Control Issues

·         Watershed Protection Areas Requirements

·         Existing Vegetation and Specimen Trees

·         Existing Site Buildings, Condition and Demolition Requirements 
 

GOVERNMENT STAFF COMMENTS

·         Planning & Zoning Department

·         Engineering Department

·         Public Works

·         Water and Sewer Departments

·         Building Department

·         Police Department

·         Fire Department 

DEVELOPMENT POTENTIAL ANALYSIS – HIGHEST & BEST USE

LAND PLAN CONCEPT

VALUE ANALYSIS

 

As we come out of the great recession, land remains the most valuable resource as our population continues to increase. Baby Boomers (79 million and about 10,000 retire per day! and Generation Y or “New Boomers” (71 million strong) will influence our real estate development decisions and our search for land. Where will people live in the future – rural, suburban, or urban settings? Each of these distinct geographic areas in your market presents a different set of circumstances.
 

Besides regulations and government restricting land, there are several key site characteristics which will be essential to your property investigation.  Every market will have its own unique issues to be investigated during due diligence phase but the following have national ramifications on real estate resurgence over the long term.
 

1. Wetlands and flood plains reduce buildable area and may extend permitting time and design complexities. New flood plain mapping has been ongoing through the great recession. New elevations and flood plain limits have been and are being reestablished. Local governments are establishing their own flood plain limits layered over top of the FEMA maps. The definition and assessment of wetland areas continues to be problematic. Do you really think that it will become easier due to environmental protection or the definition will become less restrictive? Phase I reports will remain an element of our lending practices.
 

2. Sewer will be the issue of the decade. If you have a sewer line in front of your property doesn’t mean that you will be permitted to connect. Just because a sewer line can be extended to service your property doesn’t mean that you will receive a permit to do so. Why? It is not the truck line that is the problem, although it may be undersized. Wastewater treatment plant capacity is and will be the problem for future development. Your due diligence approach has to be extensive and you have to ask the correct questions. There are plenty of “approved and unimproved” projects on the shelf in many markets. Most of these projects which would be serviced by public sewer and the owners have reserved plant capacity. Therefore a wastewater treatment plant that is at 100% capacity may only be at 70% and 30% reserved for projects that have paid their fees. Or, the worst case scenario is that there is limited capacity available at the plant and there are NO plans for expansion. In many markets, “sewer moratorium” will again enter our land acquisition terminology.
 

3. Soil characteristics of a site have always have been a site analysis requirement. Soils are also a key determining factor on the earthwork costs of a project. As the “good land” has disappeared from the market for many reasons, the available properties have soil issues. The days of walking the property and digging your heal into the ground to assess it characteristics is no longer acceptable. Then we used soils maps which are excellent for planning purposes but not extremely accurate. Then we spent some money on test pits on selected areas. Then we spend money on soil borings on selected areas. Then we prepared a soils analysis investigation program combining everything at our disposal. And, in the end, we will still not know everything about the property as we should to consider the property for purchase. Site analysis work is undertaken to reduce risk.
 

4. Roads along the property frontage and offsite will be issues for your project much more in the future than ever before. It is conceivable that local governments will use the development community to repair, maintain and build roads just because a developer wants to build a project.
 

When was the last time your local jurisdiction built a road?
 

When was the last time you local jurisdiction repaved a road?
 

Does your local jurisdiction have the funds even to maintain the roads?
 

Ownership, quality, maintenance, turnover, pavement design, inspection, bonding, design criteria, capacity studies, traffic studies may change now or in the near futures. The pent-up demand for housing and non-residential projects will cause local, state, and federal government agencies to put more and more of the road network burden on the developer.  
 

Contracts – the purchase of property will not be any easier in the future simply because of the risks due to property characteristics, government regulations and property owner sophistication. Time will be the governing factor in bringing on projects online without the commitment of an outright purchase. We will have to approach land acquisition differently while managing cash flow during the regulatory and permitting process. Perhaps it is time for more land owners to sit in on the deal!
 

Finding and buying land for large scale projects that make a significant industry wide statement may be only available to a select few or those partnering with the land owner AND/OR government!
 

Let’s take a look over the past four decades and review those projects that had a lasting impact on the industry and land.
 

1970 - 1980

The Walt Disney World Resort, commonly known as Walt Disney World and informally as Disney World, is the world's most-visited entertainment resort, located in Lake Buena Vista, Florida consisting of over 30,080 acres. To avoid a burst of land speculation, Disney used various dummy corporations to acquire 27,443 acres of land. The resort opened in 1971 perhaps changing the how large land holdings could be managed.
 

Also
 

James Rouse described Columbia as a planned new city which would avoid the leap-frog and spot development threatening the county. The new city would be complete with jobs, schools, shopping, medical services, and a range of housing choices   Close to 15,000 acres were desired to create a parcel large enough for an envisioned 100,000 person development. They set up a grid system to secretly buy land through dummy corporations. They were able to keep land acquisition at an average of $1,500 per acre from over 140 separate land owners. Columbia, MD was well underway in the early ‘70’s.
 

Also, Coral Springs, Florida on 20,000 acres started to take traction in the ‘70’s and ‘80’s.
 

1980 - 1990

Seaside is located in Northwest Florida and was developed in the 1980s as a modern Victorian town with narrow streets, picket fences and pastel-hued dwellings. It quickly revolutionized town planning across the United States.
 

The goal of Seaside was not only to create an old-fashioned beach town, but to create a social atmosphere that people enjoyed being in with every house in Seaside being colorful and different. On only 80 acres, this project brought national attention to the design principles of new urbanism.

 

Also, Weston, Fl was started in the mid’80’s as a planned community which was established as a city in 1996 with 65,000 residents.
 

1990 - 2000

In the early 1990s, the Disney Development Company (DDC) established the Celebration Company to spearhead its development within approximately 4,900 acres (20 km²) of land in the southern portion of the Reedy Creek Improvement District. Total investment for the project is estimated at US$2.5 billion.
 

2000 - 2010

Birkdale Village is a 52-acre vertical mixed use development including residential, retail and office mixed-use community located in Huntersville, North Carolina. The town center functions as the hub of a 800-acre new town that includes 4 communities of 2000 single-family homes and town houses. Included within the town center are 454,000 sq ft of retail and office space, and 340 units of multi-family housing. Birkdale opened in 2003. The idea of shared parking between non-competing uses worked.
 

2010 and Beyond – I wanted to illustrate some of the significant projects that set the stage for development patterns over the past 40 years. Disney World, Celebration, Weston, and Columbia were all large scale projects outside of urban areas. These massive projects were developed with a land basis of around $1,500 per acre or below for rural or agricultural zoned land. What is the price of similarly zoned land in your area?
 

Do you think you could buy 1,000 acres of property close to an urban center; start a new city from scratch and be profitable?
 

What do you think land managers will strive to buy in the future?
 

Will it continue to be land for a hop scotch development pattern or infill with vertical mixed uses?
 

The price of the land determines the success of the project.
 

Next Week: DESIGN

 

 

 

                       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LAND for Development Purposes since 1970

Land is being taken off the market every day and for many reasons. Successful real estate projects hinge on land. Land prices didn’t reset during the recession. What happens now?

Over the past 45 years, the US population has increased by 100,000,000 people. Over the next 40 years, our population is expected to increase by 120,000,000.

With land being a limited resource, where will all of the people live? How will they live?

We must reflect first on land as the key to answering these questions.

In most markets, “all” of the good land* is gone. So now what?

* Good land in my definition is land void of regulatory constraints. It may have physical constraints and land form characteristics which makes development difficult but we find ways to resolve these issues. We are however allowing government to restrict the use of land through regulation.

The land area is used for a variety of uses. But let’s begin with the fact that the Federal and State governments own about 39% of the land in the United States.

The Departments within the Federal government include:

Department of Agriculture i.e. National Forests
Department of Defense i.e. Military Bases
Department of the Interior i.e. National Parks
Department of Justice i.e. Prisons
Department of State i.e. International boundary between the US and Mexico
Department of Transportation i.e. FAA

About 60% of the land is privately owned; 1% foreign ownership

The U.S. land area totals nearly 2.3 billion acres. Land cover in 2001 included:

Source:

Multi-Resolution Land Characterization (MRLC) consortium (a group of federal agencies)

                                                                        Percentage

Water                                                              5.2%

Perennial Ice snow                                         0.02

Low Intensity residential                             3.2

High Intensity residential                            1.39

Commercial/Industrial/transportation        0.54

Developed high intensity                            0.19

Bare rock/sand/clay                                      1.19

Deciduous Forest                                        11.05

Evergreen Forest                                        12.11

Mixed forest                                                  2.12

Shrub/scrub                                                 21.24

Grasslands                                                  14.31

Pasture/Hay                                                  6.8

Row Crops                                                   15.54

Woody wetlands                                           3.88

Emergent Herbaceous wetlands                  1.24

Today, do you have the impression that we are running out of land for real estate development projects serving the population? If you do; you are wrong. We have plenty of land but government is slowly removing land from real estate use.

 

The changes from decade to decade:

 
 

1970’s  - no problem finding land in urban, rural or suburban locations at reasonable prices and with reasonable land owners because government oversight is only beginning. Reston, Columbia and Irvine Ranch started the planned community approach and branching away from Levittown which moved the homeowner to the suburbs but left the commercial/retail/office in the city.

During the 70’s, the biggest problem was sewage treatment plants and the moratoriums established by government until the Clean Water Act amendments passed.

The most important due diligence issue was the availability of public water and sewer.

The Federal Water Pollution Control Act of 1948 was the first major U.S. law to address water pollution. Growing public awareness and concern for controlling water pollution led to sweeping amendments in 1972. As amended in 1972, the law became commonly known as the Clean Water Act (CWA).

The 1972 amendments:

·    Established the basic structure for regulating pollutants discharges into the waters of the United States.

·    Gave EPA the authority to implement pollution control programs such as setting wastewater standards for industry.

·    Maintained existing requirements to set water quality standards for all contaminants in surface waters.

·    Made it unlawful for any person to discharge any pollutant from a point source into navigable waters, unless a permit was obtained under its provisions.

·    Funded the construction of sewage treatment plants under the construction grants program.

·    Recognized the need for planning to address the critical problems posed by nonpoint source pollution.

 

Each of the above amendments changed our real estate development patterns.

 

The motto for builders was “Where will our Children Live” – the home builders piled 2 x 4’s on the corner of 15^th & M Streets NW Washington DC with the slogan. Also because of the wastewater treatment plant issue, there was a movement to find alternative sewer solutions which led to a concentration on private systems. This opened up more land for development since home buyers had limited choices in some markets.

As you know, I follow new housing starts as my guide to assess the health of the economy. As each decade unfolds, the economy ebbed and flowed. However, to give you a benchmark, in the 70’s, we were in a recession, however, at the peak:

Prime Rate                            12%

SF Housing Starts               888,100

US Population                      213,300,000

Home Ownership Rate          64.4%

 

1980’s - not much changed in land at the beginning of the decade. We were in another recession with and suffering from “stagflation”. Regulations were only ramping up and with 18% interest rates, building homes became problematic. The recession in the early 80’s was the worst for home building and real estate development until NOW. 

As the Regan administration changed course, we started to see the home building industry blossom more from a cottage industry to regional and national builder presence – more than any previous decade. Land availability and restricting the use of land were not an issue.

Prime Rate                            20.50%

SF Housing Starts               705,400

US Population                      229,500,000

Home Ownership Rate          63.9%

The industry started to see product changes i.e. zero lot line housing, small lot single family detached homes but land availability was not an issue. However, the implementation of the Clean Water Act amendments started to infiltrate into local jurisdictions through government regulations. The expansion of wastewater treatment plants and the extension of sewer trunk lines opened up areas in and around most major markets.

In the early 80’s, the housing market was at a virtual standstill but as the decade progressed and the housing market started to heat up.
 

Another major component in developing land is access. The authorization of the Interstate Highway System in 1956 opened up locations otherwise bypassed. It took awhile to achieve results. It was not until 1974 did the first state complete their interstate highway system. In the ‘80’s, the funding for interstate highway construction was close to a trillion dollars setting the stage for developing land  

Unfortunately, as the housing market started to gain traction, the financial meltdown of the Savings & Loan industry was setting the stage for another recession.

 

1990’s – the era of regulation!

                              

                                              Early in Decade                    End of Decade

Prime Rate                            10.00%                                   4.75%

SF Housing Starts               840,000                                  1,300,000

US Population                      253,000,000                          288,000,000

Home Ownership Rate            63.9%                                   67.5%

 

It was clear at the beginning of the 90’s, the economy was in a serious recession but by the end of the decade, real estate development was at full throttle. I will talk more about the regulatory change in a subsequent blog post but during the decade, there were three national policies that significantly affected our industry for years to come…….and still are!

1.  The Urban Homestead initiative is part of the National Homeownership Strategy launched by President Clinton in 1995. The strategy brings all levels of government, the housing industry, lenders and non-profit groups together to increase the national homeownership rate.

2. The President's Council on Sustainable Development (PCSD) was established by President Clinton in June 1993 to advise him on sustainable development and develop "bold, new approaches to achieve our economic, environmental, and equity goals."

3. The United Nations Conference on Environment and Development (UNCED), also called the Earth Summit, took place in Rio de Janeiro, Brazil, in June 1992. Agenda 21 addresses the critical issues we face as a global community: continuing damage to ecosystems, the worsening of poverty, hunger and ill health, increasing world population and illiteracy. Agenda 21 is composed of 40 chapters that identify each challenge and propose simple realistic solutions towards sustainable development.

 

The Savings and Loan disaster was handled by the Resolution Trust Corporation in disposing of land assets held by S & L’s. From the perspective on Main Street, this approach worked well.

With the population increasing exponentially and with the policy to increase homeownership, the real estate industry started to gain traction. The baby boomers were also in full force during the ‘90’s buying homes, changing jobs to climb the corporate ladder, moving from location to location and expanding our non-residential real estate needs. Everything was good as we entered into the new millennium.

 

 

2000 – 2010 – we started the decade with optimism but everything changed on September 11, 2001. The country stopped. We entered a sharp but brief recession.  Housing hesitated but continued to thrive.

 

Year                            Single Family Housing Starts

2000                                       1,230,900

2001                                       1,273,300

2002                                       1,358,600

2003                                       1,499,000

2004                                       1,610,500

2005                                       1,715,800  (the peak and then the fall)

 

2012

Prime Rate                            3.25%

SF Housing Starts               800,000

US Population                      314,000,000

Home Ownership Rate          65.3%

 

In my opinion, housing did not reset during the recession and the ‘bubble” was magnified with a “false” market fueling builders to build.

Every previous recession reset housing prices and families were underwater but it was not an issue because homes were purchased as a home to raise a family and become a member of a community. This decade, being underwater meant the loss of equity and a destroyed investment.

Land remains plentiful but regulatory policies are taking hold at all levels. Also, land prices did not reset after 2005 except for those land owners that needed to sell. Since the mid-90’s, land has become a diminishing resource as a direct result of government interference and regulation. Since 2008, the real estate development industry has come to a virtual standstill. Of course development continues because that is what developers/builders do but at greater risk and uncertainty.

So, we do not know as yet the full affect government has had on the industry and land while the industry strives to survive. And, now the future

 

2010 – and beyond – if you have been following my blog posts over the past two years, land is available and well located property will sell.

My guess:

1. there is an over-supply of “finished” lots in subdivisions which will satisfy the housing demand in the short term. The need for land to fuel new projects will be minimal in the short term. Companies without the financial capabilities or vision will not be in the best position when the economy improves

2. there are plenty of “approved” housing projects on the shelf but many may lack updated permits or not be in marketable locations. The regulatory process will change adding more time from acquisition to being shovel ready.

3. housing prices will continue to rapidly escalate

4. building materials and labor shortages will be problematic for the industry

5. government regulations restricting the use of land have been increasing while the industry has been striving to survive

6. inflation is here and will become more of a significant problem forcing an interest rate dichotomy.   

7. pent up demand exists today

8. housing demand will escalate as family formations increase and as more jobs are created

9. the current lack of supply of existing homes on the market and the lack of new home construction will further stress the industry

10. the role of government in real estate development will change as the decade unfolds

11. the foreclosure shadow inventory will continue to be problematic for the industry and affect prices

12. the Fed has indicated the prime rate will stay low through 2015 --- really!

13. non-residential projects will still follow roof tops

We are entering into uncharted territory.  However, the history of the housing industry and the economy gives us a glimpse of what could occur during the balance of this decade.


Here is my guess:

 

Land will be further restricted by government

 

Land prices will increase

 

Home prices will increase

 

Demand will increase

 

Inventory will remain low

 

Interest rates will rise

 

Material and labor shortages will hinder the industry

 

New home starts will not be able to keep up with the demand

 

Inflation will continue to rise

 

The economy will improve slightly but still stress all of the above

 

In my opinion, as housing goes so goes the economy. Thus, in my opinion, the future is not so bright in the real estate development industry. This is opinion is completely contrary to my outlook coming out of the last four recessions.

However, it is an excellent time to buy real estate; especially land!

Plan for the worst and pray for the best.