Buying Land? Due Diligence is Key

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.

Subscribe to Commercial Property Review

Commercial Property Review sample

Stay on top of the market. Get breaking news and data for the Nevada County commercial real estate market as soon as it's published. These FREE quarterly reports detail local commercial lease rates, vacancies, sales prices & volume, recent transactions and more!

Subscribe Now