If you REALLY want to learn land development from the very beginning, then DO NOT SKIP OVER THIS POST! Lately I have been getting inundated with questions like, “Ok, I have some land. Now what do I do?” or “I have a partner and we want to develop property. Where do we go? What’s the first step??” And I have to admit, the majority of what I have been talking about in my posts is mainly the land development CONSTRUCTION stage, which makes up only ONE piece of the whole process! (See flow chart below). But it does not cover the planning and due diligence.
So now we’re going to take a few step back to start from the very beginning. The “FEASIBILITY ANALYSIS” and the “ENTITLEMENTS” stage. This is where the bulk of your planning and due diligence happens.
1. FEASIBILITY ANALYSIS
During this stage, developers are running feasibility analyses. This is where you will determine if it makes sense to develop. Can you develop/build and turn a profit? That’s the golden question! This is the phase where you need to research the local area, the market, growth, zoning restrictions, the timing of the market, nearby amenities, good schools, demand for your particular housing product, etc.
The Offer!
So if everything is checking out, the developer will put together what some may refer to as the “quick and dirty” or “back of the napkin” analysis to come up with an offer. (Click here to learn how!) And most likely that offer will be based upon their best assumptions and experience because you must understand something, it is IMPOSSIBLE to vet out every unknown cost associated with the site in a timely manner before making an offer on it!
Now, I’m not saying that you shouldn’t do your due diligence. You absolutely should! But it’s all about the timing! You must understand the timing of your approach. Too much due diligence before you submit an offer could cause you to lose out to someone else who ties up the property before you do. And all the while you’ve wasted a ton of your resources along the way (time, money, energy, etc).
Get Rough Estimates for Now!
This is why homebuilders and developers can analyze property so fast and make an offer pretty quickly. BECAUSE THEY HAVE THE EXPERIENCE! They know how much the fees will cost, how much it costs to develop the land, and how much it costs to build their homes. And they also know how much similar houses are selling for in that particular area! That’s your “back of the napkin” offer!
(CLICK HERE TO LEARN HOW TO PUT A “BACK OF THE NAPKIN/ENVELOPE” OFFER TOGETHER!)
But it’s not to say that YOU cannot get these costs and make an offer. Rather, you may just have to spend time calling and talking with consultants, contractors, builders, etc. to find out some rough estimates. (TIP: It’s easier to try and get a “per lot” cost or a “lineal footage frontage” cost depending on how your specific area looks at things. Because if you can get numbers that you can easily scale over the number of potential units, it makes this process a whole lot easier.)
As mentioned previously, every site is unique, which means the costs are going to vary from project to project. So the “back of the napkin” offer as stated above is not 100% accurate. Your real numbers will start coming together during the next stage: “ENTITLEMENTS”.
2. ENTITLEMENTS
So now that the seller has accepted your offer, you now move into your “Entitlements” phase. Similar to buying a house, you will also put down earnest money and have a period of time where you must perform a more thorough level of planning and due diligence before closing. And this is an EXTREMELY extensive and meticulous process (especially in California) that could take up to 3-6 months or even a few years!
You MUST have the following two things when getting started:
- Environmental Site Assessment (ESA) – Phase I
- Prelim Soils Report
And as you progress you will then obtain the following:
- Environmental Site Assessment (ESA) – Phase II
- Biological Survey Report
- Environmental Impact Report (EIR)
- Archeological study
- Acoustical Study
Environmental Site Assessment (Phase 1)
Your ESA Ph 1 will look for potential contamination by hazardous materials within the soil or groundwater beneath, which may be harmful to people or to the environment. This assessment will look for hazardous waste, underground paint, etc.
Keep in mind, you may or may not need this repot. It will depend on if there was an environmentally-sensitive industry or business on it in the past that has sold, supplied, or dispensed fuel, gasoline, oil, or other hazardous materials.
Preliminary Soils Report
If you’ve been following along with all the previous posts and videos on this site, then a soils report should not be anything new to you.
As a recap, your soils report is a thorough investigation and study of the soils that exist on your site. It includes recommendations for grading, building foundations, and structures, etc. It’s necessary to help civil engineers prepare site grading plans and gives subcontractors an idea of what they will be dealing with. (Which is HUGELY important when obtaining cost estimates!)
Environmental Site Assessment (Phase 2)
While the ESA Ph 1 will mainly consist of site inspections, review of records, and interviews (with owners, neighbors, etc.), Ph 2 will consist of laboratory testing. This is done to confirm the presence of hazardous material and levels of the samples.
Biological Survey Report
A biological survey report will deal with sensitive plants or endangered animal species located on (or NEAR) your property. For example, depending on your location some of those animal species can be burrowing owls, Mojave ground squirrels, desert tortoises, gnatcatchers, yellow-legged frogs, etc. And believe it or not, a tiny little critter can halt a massive project IMMEDIATELY and push your schedule back. It’s also not completely unheard of for an endangered bird nearby to require a contractor to spend an extra couple hundred thousands of dollars for a sound wall barrier because it’s nesting.
And also, be careful if your site naturally stores water and creates ponds after it rains. As a result, it could become a natural wetland for new critters and other wildlife, which means more jurisdictional red tape to jump through. Your land just may become a new home to an endangered species and they will get priority!
Environmental Impact Report
The Environmental Impact Report (EIR) will discuss the effects your project may have on the environment. Such effects include; air quality, gas emissions, water quality, noise, population, energy, aesthetics, biological resources, etc.
Archeological Report
An Archeological Report will be required if your site is located within an area of cultural sensitivity. Or in other words, if your site has the potential to contain archeological resources. This assessment will determine the level of cultural heritage value of any archeological resources found within the site. Some may cause you to take extra precaution.
For example, an area that may have some ties to a Native American Indian tribe may not be allowed to use any reclaimed water on the site.
Acoustical Study
An Acoustical study will estimate noise and vibration that the project would generate. As this study uncovers any potential issues, it will have recommendations such as site orientation, design modifications, building materials, barriers, berms, etc.
Engineering
Don’t forget! We STILL have to cover the engineering that will also be happening simultaneously during the due diligence stage. As well as the approval process for your “Tentative Tract Map” and “Final Map”! But we’ll discuss this more in depth in a later post! SO STAY TUNED!
CONCLUSION
Although this may seem like a simple process, it’s easier said than done. The planning and due diligence can also feel like a battle with governing jurisdictions and agencies in order to get entitlements and approvals to develop land. And it can be a very frustrating process. Some big home builders won’t even look at purchasing land if there are no entitlements with it already. Land development is not for the faint of heart.
Just be aware of this when going in to it. It’s also not uncommon that restrictions or conditional approvals as set by one agency may conflict with another’s, thus tying your hands up. It’s a lot of persistence and back-and-forth to HOPEFULLY get green lights from EVERYBODY at the end of the day!
