Whether you are considering buying land for commercial or residential development, pre-closing due diligence is crucial for a successful project.
First, investigate the property’s zoning. Read and understand the formal city or county zoning ordinance. Is your desired development a principally permitted use; a use requiring some type of conditional use permit (and generally an associated public hearing as well); or a non-permitted use? Many buyers incorrectly assume that changing a property’s zoning designation is an easy process; however, most jurisdictions will not allow “island” zone changes – where one property’s zoning differs from that of the surrounding properties. A zone change also typically requires agreement of all adjacent owners as well – something that can be very difficult to obtain. Finally, be sure to confirm your findings by visiting the controlling jurisdiction’s planning department and speaking with a knowledgeable planner.
Second, investigate the property’s true value, which stems from various factors including: 1) the net useable acreage, which is the gross acreage less square footage related to things like perimeter setbacks, slopes over 30%, wetland areas, stream or utility setbacks/easements, heritage tree areas, open space requirements, etc. Items such as these can dramatically affect the developability and value of the parcel; 2) recent comparable sales: obtain “sold” and “on market” sale comps to understand what similar properties are selling for. Active local real estate agents are a good source for this information; 3) site specific development constraints and attributes: might there be protected cultural or biological features on the property; what utilities serve the site, where are they located, and what are the costs to tap into them; does the topography necessitate expensive site work related to storm water drainage, retaining walls, importing off-site fill; will the intended project create traffic impacts incurring expensive mitigation fees; is the property saddled with municipal bond fees over and above typical property taxes; and very importantly, what is the environmental condition of the property?
Finally, structure the purchase transaction in a beneficial manner. Inquire about possible seller financing which can offer tremendous savings. Obtain a Phase 1 environmental survey, which will bestow a level of liability protection from existing or previous contamination on the site. Almost all commercial lenders will require a Phase 1 on a land purchase because as “deep pockets” lenders strive to make sure they avoid entering a potentially very costly chain of liability. Structure the escrow to provide sufficient time to complete necessary due diligence studies. At least three weeks should be allocated for obtaining a Phase 1 report, which will typically cost around $2500. An experienced real estate agent can be of invaluable assistance negotiating deal structure, escrow timing, closing costs allocation, and insuring the intended project is as successful as it can be.
