The term ‘grandfathering’ is commonly used in many different circumstances when dealing with a possible exemption to a rule, requirement, or change to any existing conditions or standards that apply to a variety of situations such as businesses activities or occupational requirement. Often employees or tradepersons find themselves in a situation where they may become exempt to a new professional requirement by the act of being grandfathered-in by means of previously acceptable conditions. In fact, there are a wide variety of circumstances where the grandfathering of a pre-existing condition or requirement is applicable. However for the purposes of this article, a common situation where the application of a grandfathering-in of a structure, use or occupancy when dealing with zoning codes, land development regulations, and permit requirements will be reviewed. The term grandfathering is often applied to address uses, activities, and structures that may be adversely affected by the adoption of new restrictive ordinances, land-use designations, or code requirements.

Historical Perspective

The term grandfathering or grandfather clause has been cited as having its origins in the amendments to constitutional provisions of many southern U.S. states around the late nineteenth century. Black’s Law Dictionary and West’s Encyclopedia of American Law explains that the original purpose of the ‘Grandfather Clause’ was to keep newly freed African-Americans and certain groups of people from voting, mainly in the southern U.S states. Theses clauses denied voter registration to people who didn’t meet certain requirements unless their grandfathers had served in the Confederate Army therefore if a person’s grandfather could vote, so could they. In 1915 the U. S. Supreme Court declared these types of clauses unconstitutional; however, the term grandfathering is still a commonly accepted term when addressing exemption provisions for zoning regulations. Today, grandfathering of a structure, business activity or use provides an exemption from current codes or other newly adopted regulations that would make it otherwise prohibited or fail to meet current codes because it was lawfully in place prior to any change or requirement affecting its existence, use or lawfulness. When a property or use is grandfathered-in, it is said to be non-conforming to any current codes or requirements. There is often a misconception that just the prior existence of a structure or activity or other use is okay if built or in place prior to the adoption of a related code or ordinance, however, the key to grandfathering is that the affected area or item of concern must have been lawfully in place prior to any change or prohibition. Additionally, there are laws that can be adopted for life-safety reasons that would not allow the continuance of any use or structure that is determined to be dangerous just because it has always been so or an new law may contain an amortization period where affected persons are put on noticed of a certain time-frame for when a use must conform to current codes or otherwise be ceased to exist.

Concerns for existing structures

It is important for owners of older properties to check with their local building and zoning departments prior to pursuing any construction or repair activities, not only to ensure what permit requirements may be necessary, if any, but also to obtain knowledge of any pre-existing conditions or new requirements that may affect the project or use. Any use or structure that does not conform to current codes or requirements for similar uses or structures would be considered non-conforming or that which does not conform. For example, in Florida, there are windstorm requirements for the installation of shutters or safety approved windows for new construction due to the changes in the Florida building code due to need for building safety from hurricane force winds and related effects of these storms. For an existing structure with older windows that do not conform to the latest safety standards, if the replacement of these windows becomes necessary, in order to meet this requirement, it may be required to upgrade all the windows or provide proper window safety coverings installed over the windows on the entire structure. Because of the life-safety and property protection nature of this requirement the existing windows on your property may not be grandfathered-in due to this requirement. However, the local building department would be able to advise if an exemption to this requirement would be allowed for only minor repairs for broken window panes or a replacement of only one window is needed.

Further considerations

Another scenario could involve the repair of an existing accessory structure, such as a fence, where there has been a change in permit requirements or new restrictions limiting size or location of new fences, the grandfathering provision may also not apply. Just because the fence may already be in existence and previously permitted, modifications or major repair may constitute adherence to any new regulations or requirements adopted by a local jurisdiction, change in building or zoning code or sometimes even a local neighborhood restriction as an architectural guideline or neighborhood enhancement standard. Often when existing structures are not in conformance with current code, such as one that may restrict the location of new fences in front yards, when an existing fences that are located in front yard need to be replaced, this may cause this existing fences to now be required to conform to the current neighborhood standards. Unless there is a minor repair provision, usually repairs to an existing structure that exceeds a preset percentage of the structure, such as a certain value of the work such as exceeding 50% or more or the area of the structure or value of the work or if a new building or zoning permit is required will require the structure to now be brought into conformance with current code requirements. This is how a neighborhood progresses towards all properties conforming to current neighborhood standards by requiring adherence to current codes when it makes sense and only exempting those properties that truly remain grandfathered-in by maintaining their nonconforming status either because no major repair or modifications requiring permits where necessary or changes to the a structure or use have remained within prescribed limitations. Be very wary of any contractor that tells you that a project does not require obtaining any permits or local jurisdiction approvals or homeowner association reviews unless it is for minor repairs or you are absolutely sure that it does not because if it does or it may affect a grandfathering status, it may cost you more money and headache in the long run if it is to be corrected after the fact.

Scenario of a common dilemma

A common area of concern occurs when a new property owner is faced with the dilemma of dealing with work that was previously done without permits to a property that they now own. When parts of real property such as an accessory structure like a shed or a property addition has been constructed without permits and required inspections it can be a real headache, especially if the work does not meet current code requirements or even worse, if it is not allowed or in the wrong place. This often occurs because the previous owner or owner at the time that the work was performed failed to obtain permits for the work and therefore the construction was never reviewed by all applicable agencies such as building, zoning, environmental, and engineering. Even though the work was done prior to a new or current owners awareness, it would not be grandfathered in because it was not originally done lawfully. Often property owners who find themselves in this type of situation may feel that the lack of a permit should be overlooked because whatever was done may not be thought to bother anyone else or that it does not serve any substantial purpose or protection of the general welfare to require a permit be obtained after the fact or if a long period of time has passed. However, the fact that a previous owner overlooked the responsibility to obtain a permit and required inspections does not negate the responsibility of the jurisdiction to enforce the codes once it has been made aware of the violation. To do so would be neglectful and the problem would not go away but would remain to be dealt with by a future unsuspecting purchaser or if something terrible were to happen because of poor workmanship or the unearthing of unknown consequences. In some cases, the building or zoning official may be able to provide alternative options towards bringing the property into compliance or obtaining an exception to the code requirements if a variance is sought and certain conditions are met. This is important if the problem was not self-created such as in this scenario.

The Quest for the Grandfathering Status

The need for the application of a grandfather status to a particular situation often arises when a new owner who is unaware of any problems or limitations on a property begins a home improvement project and either clears away obstructions that have concealed the construction from view, such as with overgrown landscaping or vegetation or upon the review of property survey or construction plans for the application of a new permit. Another common situation is when a change to an existing use of a property that is no longer allowed by the zoning code occurs or a new property owner applies for a use that is determined to have been previously discontinued and can no longer occur. The discovery of an existing problem may even occur upon property visits by a code inspector for other violations, when inspections are performed for the permit for new home improvement work or even by obvious visual reasons where a seasoned inspector can easily see that work was done without permits. This often occurs because since un-permitted work has not been reviewed by building and zoning officials, the awareness of code requirements or zoning limitations, such as setbacks from property lines, can be easily violated without being aware. Unless a new property owner can address this issue with the previous owner or through some type of title insurance claim, they are usually faced with the unfortunate responsibility and costs of trying to correct any problems un-permitted work may cause or address an expected use of a property that will not be allowed by the zoning department. Some jurisdictions may require that any property owner who is aware of work done without permits or if a violation has already been issued be responsible to disclose same to any future or prospective purchaser of the property. For example, in the State of Florida, Chapter 162.06 of the State Statutes requires the following:

“If the owner of property that is subject to an enforcement proceeding before an enforcement board, special magistrate, or court transfers ownership of such property between the time the initial pleading was served and the time of the hearing, such owner shall (a) Disclose, in writing, the existence and the nature of the proceeding to the prospective transferee; (b) Deliver to the prospective transferee a copy of the pleadings, notices, and other materials relating to the code enforcement proceeding received by the transferor: (c) Disclose, in writing, to the prospective transferee that the new owner will be responsible for compliance with the applicable code and with orders issued in the code enforcement proceeding; (d) File a notice with the code enforcement official of the transfer of the property, with the identity and address of the new owner and copies of the disclosures made to the new owner, within 5 days after the date of the transfer. A failure to make the disclosures described in paragraphs (a), (b), and (c) before the transfer creates a rebuttable presumption of fraud. If the property is transferred before the hearing, the proceeding shall not be dismissed, but the new owner shall be provided a reasonable period of time to correct the violation before the hearing is held.”

Certain state constitutions or statues may allow for a use or structure to continue if it has been in existence over a certain period of time depending on the law. An example of this would be if a state provides a statute of limitations whereby if a building code permit provision has not been enforced for the construction of a structure for more than twenty-years then a local jurisdiction cannot require the structure to be brought into current code conformance unless the jurisdiction is able to meet certain requirements that warrant such action. However, because the building codes are usually considered specifically dealing with life-safety, most work done without permits unless specifically exempt by code or statue would not be allowed to exist once discovered. The codes are not only designed to prevent harm and property damage to the general public but also to protect each and every individual from harm to themselves, family, tenants, or guests by occupying or utilizing unsafe structures.

Conclusion

Although code enforcement officials and inspectors are tasked with the responsibility to address possible violations for losses of nonconformance or items that are not in conformance with current codes, every situation encountered should be treated as an individual case and handled based upon its own history, facts and records. Code officials can assist with researching records, such as building permits, zoning approvals, certificates of uses or other prior board determinations to make a determination if something is or is not grandfathered-in. If a property was lawfully existing or a use was already established before a change was made to prohibit such use or construction, certain evidence such as photos, plans, and even testimonial affidavits may become very useful in assisting the local building and zoning departments to establish a legal nonconforming use or structure. Additionally, because there are always other factors, circumstances or applicable laws that may affect a determination of grandfathering, any concerns regarding the application of grandfathering should be discussed with your code enforcement official, local building and zoning department officials, municipal or county attorney and other qualified professional or counsel. There may be numerous procedural steps, exemptions, and laws that may apply to your particular situation so be sure and get all the assistance and information that you can, especially when dealing with any legal concern. It is often recommended that before the purchase of any property, that buyers obtain the services of a reliable and reputable inspection service, as well as, paying a visit to your local building and zoning departments. Some jurisdictions may offer a prospective property buyer to obtain a pre-purchase or pre-occupancy inspection for a property to determine if there are any existing liens, encumbrances, outstanding permits, violations or limitations on proposed uses.

Exfiltration Systems-Why They Work

Civil Engineers ordinarily calculate stormwater retention ponds to meet the requirements of your land development project. Nevertheless, any stormwater pond commonly will take upwards of 10% to 20% from the total available land area. The particular size of these storwater management basins is largely based on the types of soils encountered onsite; all other factors being equal. Your land that’s utilized by it can’t be utilized for vehicular parking, or for construction of buildings. In this short article I will summary the exfiltration trench requirements from the City of Orlando, Orange County, Seminole County as well as the City of Sanford.

Provide For Greater Utilization Of Land Area

In order to allow a greater use of the land for its intended use, “exfiltration trenches”, or underground vaults could possibly be utilized. Underground stormwater management systems are a viable method of handling the stormwater management needs of the project, especially where availability of land is limited. Utilizing an underground system for managing stormwater enables the use of the area above it for parking and buildings. This then allows the same area to be utilized for two complimentary uses and increases the yield of the project.

Exfiltration trenches are created from drainage pipes with smalls holes throughout its length. Underground vaults, conversely, are manufactured from concrete structures with a large open area underneath and open along the bottom. Both of these systems provide a traffic bearing surface for vehicular traffic and parking.

In order to create the necessary volume exfiltration trenches are made up of perforated drainage pipe situated within a graven bed. This provides both a means for percolating the stormwater volume into the ground and a structural support for the pavement above.

How The Regulations Differ From Agency To Agency

Orange County is just about the most developer-friendly agency within Central Florida except when it comes to exfiltration trenches. Orange County will allow the use of exfiltration trenches, however, the criteria for its use makes them undesirable.

Section 30-281(3) Orange County Land Development Regulations state: “in the event the exfiltration system fails, the stormwater will be retained on-site for the full twenty-five-year, twenty-four-hour storm prior to any stormwater being permitted to leave the site.”

This in essence necessitates the actual site to get designed like a bowl to ensure that all 8.6 inches of rain around the entire property is stored onsite. This demand requires the site to become a bowl for storing all of this rain. This may allow roughly One foot to Twenty-four inches of water over the property especially over the particular parking lot as well as landscaping areas. This is a very extreme requirement which makes the usage of this outstanding strategy for stormwater management unworkable as well as unlikely to be utilized. This is not shared by any of the nearby municipalities.

The City of Orlando, Florida provides advantageous conditions with regard to utilizing exfiltration trenches for stormwater or underground vaults. The City’s engineering manual is currently being revised to allow, civil engineers, to design these systems with a safety factor of 2. This is equivalent to the requirements of Seminole County, The City of Sanford and the St. Johns River Water Management District.

The particular exfiltration trench system needs clean-outs at one end and manholes at the other end. Clean-outs and/or manholes need to be spaced every three hundred feet in order to facilitate maintenance. Civil engineers find that this strategy adheres to good engineering practice without being over-kill..

Seminole County also offers positive requirements regarding the utilization of underground exfiltration systems.

The Seminole Code Appendix B, Chapter 4.2 c. (4) states: ” Exfiltration systems shall be designed with a safety factor of 2.0 (i.e., design using one-half of the permeability rate or one-half of the time for drawdown).”

This criteria meets good civil engineering practice and one that is conservative without having unnecessary negative consequences in the design of underground exfiltration stormwater management system.

The City of Sanford land development regulations includes equally beneficial criteria with regard to the use of underground exfiltration systems for stormwater management.

The municipality’s land development Schedule O, Section 2.4 states: “shall be designed with a safety factor of at least two… Furthermore, a sediment sump is required ahead of the exfiltration trench system in order to capture sediments that may clog the pores in the pipe and/or gravel.

The civil engineer designs this sediment sump to capture sediments in the stormwater runoff which may clog-up the pores inside the pipe or the rock bed. The City’s strategy is similar to that of Seminole County and without undue burden.

The regional agency in charge of stormwater management systems is the St. Johns Water Management District (SJRWMD). The District has criteria pertaining to exfiltration trench techniques which is actually very similar to that of Seminole County’s, the City of Orlando, and the City of Sanford. Orange County is the only municipality which discourages the utilization of these underground stormwater management strategies. Exfiltration trench methods tend to be a good effective means of managing stormwater and may assist increasing your property’s yield. This allows for a more cost effective stormwater solution which tends to increase the Return on Investment.

Increased Land Yield

Underground exfiltration systems allows an additional effective increase in the land area between 10% to 20%. Depending on the value of the land or its availability an underground exfiltration system may be the difference between a viable project and one that is not.

You can make a fortune in land. Having said that, I will not sugarcoat what is probably one of the most difficult types of real estate investing. The reason you can double, triple (or more) your money in land is because it is one of the least understood real estate investments. This provides incredible upside if you know what to look for and what to do because very few people understand land. This is no different than any business however. Think about used cars, for instance. If you know cars inside and out, you will be able to buy a car cheaply from a person selling their car who doesn’t know its value. You can then turn around and sell it at a profit. You have capitalized on your knowledge. Additionally, you can fix the fender, buff and shine and even make more money by creating more value. The same thing applies to land. You buy from someone who doesn’t understand what can be done with it and you capitalize on it.

The key elements in making money land are the following:

1. Know your market. Don’t even think of buying land outside of the market area you know intimately. Little things can trip you up even if it looks like nothing can go wrong. Start looking at every land parcel in your market.

2. Dream team. You can’t do it alone. You will need to have close relationships with a civil engineer, land attorney, Zoning official, site contractor, real estate agent and lender.

3. Understand what sells. You have to know what type of land is selling in your market and at what price. You will need to have better quality at a lower price. Land is the hardest asset class to sell and has no cash flow. This is very important.

4. Know your zoning. Almost every town has zoning regulations which describe in a table, usually, the basic requirements to have a legal lot (frontage, acreage, setbacks, etc.). In areas without public water & sewer, you will also need to know health codes, soils, and wetland issues. Essential to know.

and finally…

5. Create value. This is what its all about. You can buy land at a discount and flip it or you can really make money by improving it, then selling. The types of improvements include, zone changes, approvals for a building lot, subdividing, land enhancements (access drives, viewscapes, & beautification), free cuts, merging of title and conservation tax easements, to name a few.

Once you have a land parcel targeted, there is another major step involved which is the Purchase Agreement or Option. How you structure this can make the difference between making money and making A LOT of money. But that is left for another article.

Don’t think you are going to go out and make a fortune in land without first having a lot of knowledge. You will get hurt. On the other hand, study and learn and you will profit handsomely.

Go to my website http://www.realty-capital.us and read my course under education if you like. I give specific examples of land deals I have done. Thanks!

Owning land has always been a wise decision, especially if you have invested in commercial land in time. Your property is gaining more value day by day, this typically happens when the local real estate markets witnesses large scale development in your local neighborhood. A very famous saying by Mark Twain – Buy land, they’re not making it anymore.

Owning a commercial land

Owning land property and knowing the real value is important. Well planned and timed commercial investments would pay rich dividends in the future, making you richer and wealthier. As a land investor it is very important to view a wide horizon, keeping in mind the future developments that would take place in the local neighborhood. In a country like India, most of the commercial land is zoned and auctioned by the local government authorities; you could pick your choice and bid your offers, or keep your commercial real estate broker informed of your interest in commercial land investment. A good broker could offer you a lucrative land deal through second sales, you may be lucky to latch on to a land deal which is in a consolidated format with a good frontage along a national high way. Or has access, frontage of two major roads. Consolidated land formats could give you very high value returns in the future.

Selling Land

As a commercial property investor / owner you have a choice, which you can use to get higher returns on your investments. Property investors do not hold on to properties for a very long period of time, as they aim to get returns on their investments faster as possible, most of the investors exit during this stage. It is noticed large business houses and industrialist invest in commercial property, with a view to either sell it and gain profit margins or develop the commercial land and expand their business operations to the new locations, targeting a larger volume of customers to boost to their business.

Joint Venture Development

Commercial development also gives a steady cash flow to the owners / investors. You could still maintain the ownership of the land though a JD (joint development). There are real estate developers, private equity funds, investors who are more than willing to undertake a joint development on approved sites. The options can range from commercial offices, business & IT parks, strip malls, hospitals, resorts and motels and mixed use development of commercial and star rated hotels. Entering into a JD for a land owner is not very difficult and is commonly viewed now days, the developers are more than happy to partner with commercial land owners. This is a process where commercial real estate agents, legal consultants, property valuers etc work side by side to structure the joint venture, giving consideration to the viability and feasibility of a proposal.

Commercial or residential land is always a better property investment option than any other property format; land appreciates faster and gives you better and faster returns.

Using what we call “OPM” or Others People’s Money the best and really the only way to finance any of your developments, and in saying that, any of your real estate investments!

This may not be new to you, but many people are amazed and the response that is heard often goes something like this “ahh, so that is how they do it”.

Depending on where you live in the world, there are several methods that can be used to obtain financing. In the USA there are generally 3 ways.

1. Direct working relationship with the seller

2. Use options to control the property

3. 1031 exchange

The 3 method here needs sophisticated explanations and requires the services of an accountant and legal advice, therefore it will not be discussed in this article.

Working directly with the seller allows you to provide him/her with what it is that they require, you satisfy their needs! This is critical to your success when using this approach. If you satisfy their needs first in this transaction, you will get your needs satisfied. You also need to work on your personal skills and become a very good listener if you are not already. Remember, it is THEIR land you want! You must communicate very well.

So they become your partner in this deal, in the land development transaction. So if you have finance qualification issues, (which some do at the present moment I might add) the seller helps you by taking on the debt themselves and in return you the unqualified buyer is able to get the deal you were not able to get initially. In return for this “help”, the seller demands a better slice and therefore a more attractive sale price.

Concomitantly, the seller also benefits by receiving a greater after-tax profits. This occurs due to the fact that the seller is ‘carrying’ the paper, the sale amount will not be taxed instead it will be based on the instalment payments made over the years. So instead of having a hefty capital gain tax bill due to being pushed into a higher tax bracket, they may be able to stay within a lower bracket due to instalment payment being made over a period of years therefore enabling them to stay in a lower tax bracket then if they obtained the complete sale amount in one lump sum.

Controlling the Property By Using Options For Financing Land Development.

What is an Option? It is a specified agreement detailing future performance in exchange for a benefit.

In laymans terms, it means that you cough up some funds, and you get to control the property!

So what you are effectively doing is obtaining control of the land by buying this control. In other word, you agree upon a price for the option to buy the land that you are to pay at an agreed upon date in the future.

This is all done legally and is very simple to have in a contract. At any period of time in the future before the expiration date of the option, you can exercise your right to close the sale and take control of the land. Legally the seller must sell when you have the funds and commit to the purchase. If you know your markets, you can also do very well from this transaction itself. By buying land a fair market value at the time of the contract, and as the market rises you are still able to obtain the agreed upon price for the land that you made at the earlier date. The seller still must sell at this agreed price even if the land value has tripled in the time period you agreed upon! This is why it is so important to be up to date with your ‘patch’ and what is happening in the market where ever you are.

A more detailed and sophisticated approach to options is the rolling option. This is generally used for large parcel land development transactions. This is quite a detailed and complex agreement, and therefore should require more knowledge and experience. Utilization of the rolling option occurs when a large amount of property it being purchased to develop master planned communities. Such as when developers are creating ‘phases’ in the development project with an absorption of dwellings usually exceeding 5 years.

What the buyer typically does in utilising the rolling option, is that they control the entire tract by being able to ‘put up’ one option at a time, and after each execution of the options the buyer is able to take control of more land until they control the entire parcel of properties that was contained in the original contract.

Execution of the options must take place when they are due or the entire contract in null and void and therefore cancelled. The seller then has the right to put the property on the market again at the same time keeping the initial premium.

The buyer benefits by having a contract that if adhered to, allows them to be able plan their development for the entire property package with the knowledge of what they are to pay for the land, and this therefore allows them to create the most important pre development work, the development ROI (return on investment) calculations.

The primary benefit to the seller is that they obtain their desired and agreed upon price, and if the deal does not come to fruition, they receive the sizable option premium and the land can be sold again. If all goes well, they receive the entire agreed upon price.

People who want to invest in land to either “develop” it (as that term is defined in the articles in this Land Development Values series) or to build on it and sell a total package (e.g., a new home on its lot) have to sift through many parcels because everybody wants to try to sell them a property! The process of identifying the parcels that are worth pursuing, therefore, is very time consuming, and land buyers need tools to enable them to quickly weed out the junk and identify those parcels that warrant further consideration. So buyers typically use rules of thumb and formulas for their preliminary screening.

These rules of thumb are designed to provide rough estimates relating to the yield of a site and different cost factors because these are the key aspects in calculating the “right” price they should pay for the land. By defining the price at which the numbers work, land buyers can see within minutes if the seller’s asking price is realistic. If the land parcel is substantially overpriced, the buyers can simply discard the property and move on to better prospects.

Commercial Land Developments
Not surprisingly, the methodology for roughly estimating site yield and improvement costs is not the same for both residential and non-residential land developments. For retail or office parcels, the yield is the amount of potential building space that can be built. This is usually a function of the number of parking spaces that will fit on the parcel and taking into account the overall development limits imposed by impervious coverage and green space requirements set by the zoning ordinance. One rule of thumb might be used to estimate the total amount of land area needed for each car that would be parked on the office property (e.g., square feet for parking space plus drive aisle). Another would approximate the amount of land area taken up by sidewalks and walkways. A third rule of thumb might assume that the cost for vertical and horizontal improvements would be $100/sq. ft. of office space.

Residential Land Developments
The rules of thumb applied to residential land developments would be designed to estimate the number of building lots that the parcel could produce once the subdivision had been completed, and the cost for horizontal improvements. The value of each “raw” building lot would be calculated based on the projected sale value of the finished product (house on its lot) and the improvement costs.

One site yield rule of thumb might net out of the gross land area of the parcel the amount of square feet that would be wasted or couldn’t be used for whatever reason and then would divide the result by the amount of the minimum lot size required by the zoning to come up with the number of lots. For example, the rule of thumb calculations might look like this for a 15 acre vacant parcel zoned for 20,000 sq. ft. lots:

Step 1: 43,560 sq. ft. x 15 acres = 653,400 sq. ft.
Step 2: 653,400 sq. ft. x 70% = 457,380 sq. ft.
Step 3: 457,380 sq. ft. divided by 20,000 sq. ft. = 22.87 building lots

The final result is always rounded down, so there would be roughly 22 building lots for this parcel. In the second step, 30% of the gross site area was deducted to account for wastage, square feet lost because of natural constraints (e.g., slopes, floodplain, irregular shape) and land area that would be taken up by new roads in the community.

Remember that rules of thumb can vary by geographic area. They are rough estimates so you should modify them as circumstances warrant and not just apply them blindly. If a substantial portion of the 15 acre parcel was in floodplain, it wouldn’t make any sense to deduct only 30% from the total gross site area. If you’re not sure what rule of thumb to use, be conservative.

People who invest in land for a living, like builders and developers, know that following a couple of cardinal rules can mean the difference between having a deal that’s potentially viable and one that is a disaster in the making. Here are the principles that influence their purchasing decisions.

Rule 1: Location
Location is the most important aspect of a property because it’s the only thing that cannot be changed. You can demolish or add onto a house or maybe even pick it up and move it, but you cannot pick the land up and move it. Location determines not only how the property can be used (zoning) and accessibility to public utilities, but also the parcel’s value based on the surrounding properties. There is no substitute for a good location.

Rule 2: Value Is Always Related to Use
The value of land for development hinges on its ability to be used by buyers. A 10 acre parcel with substantial areas of floodplain, steep slopes or wetlands may produce only one building lot. Its value will ultimately be determined by what a buyer can do with it (i.e., build one house) and not by the number of acres it has.

Rule 3: More Target Markets = Higher Value
Value increases if the parcel can be used by many potential buyers or categories of buyers. Several factors determine the market appeal of development land. These include uses permitted under current zoning, location, availability of public or on-site utilities, physical characteristics, and legal restrictions. Suppose you’re thinking about buying a property that abuts a pig farm. It has everything you want, including a cheap price tag. But chances are, you won’t find many buyers for it when you go to sell. Conversely, you will have to pay more for a parcel abutting parkland, but you’ll have your choice of buyers willing to pay a premium price for it.

Rule 4: Value = Price + Terms
Ultimately, buyers determine what a property is worth, but an offer is much more than just price. It’s a set of scales with price on one side and terms and conditions on the other. The real value of development land is the price a buyer is willing to pay in exchange for terms and conditions. For example, you want to buy a landlocked parcel. You need to know if the owner of the adjoining property will sell off some frontage. You don’t want to purchase the frontage unless the seller accepts your offer and you don’t want to have to buy the property if you can’t get the requisite amount of frontage. So you would give the seller an offer contingent on your being able to get the frontage and anything else you’d need to be able to sell the parcel to builders. You would offer the seller a higher price if the seller would agree to these conditions than if the seller wanted to sell “as is.”

Rule 5: When Buying, Think Like a Seller
Before you decide to buy a land parcel, you should evaluate it as objectively as possible and try to identify objections that buyers might have when you go to sell. In short, when investing in land, think like a seller because your goal is to sell the parcel, not live on it. When builders purchase land for development, they evaluate it in the context of the property’s appeal in the eyes of the end users (i.e., home buyers or those leasing or purchasing office and retail space).

Rule 6: Do Your Due Diligence
Most of what you need to know about the land parcel cannot be seen. So many issues need to be investigated, including zoning, utilities, surrounding property uses and values, deed and other title restrictions, and the site’s physical features. It’s absolutely critical that the due diligence be performed thoroughly, even if that means you have to hire somebody to do it for you. There are no short cuts here. Incorrect assumptions, bad information and what you don’t know could come back to haunt you.

Developing land can be profitable, but if you’re not prepared red tape, cost overruns, and building delays can make the process feel both endless and difficult. Want to ensure your land development goes smoothly?

In this guide we’ll discuss assessing your needs, finding the right property and staying on budget and on schedule.

Tips for getting started

Before you start looking for properties, you’ll want to spend some time thinking about what kind of project you’re looking to do. If you’re a first-time developer, you may not want to start off with an entire subdivision or a large-scale commercial property. You may also want to keep your first project close to home, where personal connections can help you with both the red tape and your search for a trustworthy, high-quality builder.

You’ll also want to look at what you can afford as you’ll likely be paying for some or all of the development costs with a loan. The size of the loan you can get depends on factors like your income, assets and how much experience you have with developing. Talking with a local banker can help you get a better sense of the loan size you can expect to get. More experienced developers may want to consider other options for financing, such as attracting individual investors or contracting with a seller who can help shoulder development costs.

Finding the right piece of land

Once you’ve thought about your ideal project and your budget, you can start looking for vacant land. Look at several properties that fit within your size and budget requirements and then analyze the locations. To do this, it helps to think from the future owner’s point-of-view. If you’re building a family home, you’ll want to look at the quality of schools, access to parks and the distance from the city or office developments where the owner is likely to be employed.

Once you’ve found a property that looks like a good fit, it’s time to ensure your investment is a sound one by looking at these three areas:

1. Site desirability: good schools and transport links won’t save a property that’s located in a flood plain or near to a plot slated for undesirable development, such as a water treatment plant. You may also want an engineer to come out to look at things like soil quality, drainage issues or environmental problems.
2. Local political situation: politicians can be a major roadblock to your development. Do your homework in advance by seeing if there is anyone strongly anti-growth or against the kind of projects you’d like to do.
3. Financial situation of the local jurisdiction: a local budget crisis can mean serious permitting delays as staff is laid off or furloughed, or increased costs for infrastructure if the community can’t afford its usual share.

Controlling your costs and schedule

Once you’ve decided on a property you can move on to more in-depth planning. You can start by creating a master schedule, a key tool that can help you keep your land development project under control. Write down each step in the order it should be performed in, starting with planning and continuing through each step in the permitting process. While many tasks can be handled at the same time, keeping an orderly, updated schedule will make sure you don’t cause delays by missing vital steps. This is important, since the sooner you start construction, the less interest you’ll accumulate on your loan.

To keep things moving, know where you can speed things up. For example, consultants, engineers and architects can often complete work more quickly if you ask, but local agencies or regulators usually won’t.

Another way to keep your project on track is to work with quality contractors. While it may cost more to hire someone who works to a high standard, it can actually be more costly to work with someone who does subpar work. If planning boards ask for changes in design or city engineers cite you for not being up to code, it can cause costly delays. Working with people with a good reputation and inspecting the site often can make sure that quality stays high. And in the end, a commitment to quality will likely pay off a second time, when you start marketing your development to buyers.

Property development due diligence involves many steps. When done correctly the risk involved with land development are greatly reduced and the odds for profit are increased considerably.

The first step before signing your contract with the Seller is to clearly negotiate all terms that you require. If you and the seller understand all that is expected of both parties, in particular during the due diligence period, you will avoid potential problems down the road. This is where your attorney comes into place. I highly recommend hiring an experienced real estate attorney that is familiar with negotiating land purchase contracts and working with developers. Purchasing land is risky and it is best to minimize your risk from the onset. Typically land purchase contracts go through numerous negotiations and revisions. It is much more difficult after the contract has been signed to get the parties to agree to contract amendments, although contract amendments and addendum are prepared quite frequently based upon inspection report findings and other events that occur during the due diligence period.

Requesting in the contract that the seller provide inspection reports or other documents you require during the due diligence period is crucial in evaluating whether you are able to achieve your development goals with this particular piece of property. Be sure to provide a time period for the due diligence that all parties must comply with. 30 to 60 days is the minimum due diligence period for the buyer to conduct his due diligence but 120 days or longer is not uncommon with complicated acquisitions or parcels that require rezoning or are contingent on permit approvals.

There are many factors that you should consider which influence purchasing unimproved land. Since purchasing raw land has risks, I suggest you keep in mind the following (Please Note: Much of this information was gathered from the website Property Development Source):

1. Title Issues.

Are there any clouds on the title? In other words, does the seller have clear title to the property? Review of all title reports and underlying documents affecting the property is crucial. Having a real estate attorney review the documentation on your behalf is recommended whether you are a novice or experienced investor/developer. However, you should review the documents yourself too. Ask questions if you do not understand something or it looks odd to you. The main concern is to make sure the seller does in fact have legal and clear title so that you will not have any legal issues later on. Title insurance protects you in this regard, but you do not want to have to be litigating title issues when they can be discovered early on before you close the deal.

2. Survey Issues.

Are there any encroachments from adjoining properties on your land or vice a versa? Encroachments could be neighboring buildings, utilities, easements, fences, water, etc. Are the property boundaries clearly marked and surveyed? If there are encroachments, you and the seller will need to be able to resolve the issues prior to closing. Some issues may not be able to be resolved or resolved in a timely manner and you must decide if you still want to purchase the land despite the unresolved issue. You may need the seller to obtain what is called an easement from an adjoining property. An easement is a written document allowing one party use of another party’s water, road, utility lines, parking spaces, driveway, etc. An easement is typically drawn up by the seller’s attorney and reviewed by your attorney. Title companies will exclude encroachment issues from your coverage so it is important to resolve these issues immediately.

3. Land Use Approvals.

Zoning regulations, site plan approvals, building permit and approvals, lot size, setback issues, fire safety issues, environmental and health issues such as sewer, septic disposal, storm water management, streams, rivers, wetlands, etc. Recommend obtaining an environmental report to determine if there are any problems with chemicals, pesticides, pollution, etc.

4. Availability and Access of Utilities.

Access to utilities, water, electricity, gas and sewer/septic systems, telephone, cable and internet is another concern that needs to be investigated. If access is not readily available, it can be costly to get basic utilities to the site.

5. Accessibility of roads.

Are there roads already in place or will you need to build them? You also need to consider the cost of maintaining the roads.

6. Topography, drainage and flood zones.

Recommend obtaining a soils report and geology report. Is the property in a flood zone? There are designations of flood zones areas and insurance availability is conditioned upon what flood or fire zone properties are located in. Slope issues, stability.

During the due diligence period, the seller must provide you with certain past or current reports that he has in his possession such as geology, soils reports, environmental reports. It is best to request these in your contract so that all parties are clear about what they need to deliver to each other. Depending on how old the reports are you can then decide if you want to rely on the seller’s reports or obtain new ones. Also, be sure your contract states the seller will assist with any permitting or regulatory actions that may be required during due diligence. (Often local permitting agencies won’t release information or accept rezoning or permit applications without the present owner’s signature. This clause in the contract states the seller will sign these type of documents as needed.)

It is also important to remember that the seller cannot legally sell the land to someone else. He can take back-up offers, however. A back-up offer is another offer contingent upon the first offering not going through and the first buyer canceling the deal. It is totally legal and ethical for a seller to take backup offers and this practice is done frequently in a seller’s market [where demand is high and inventory of available properties is low]. The seller cannot legally disclose to the second backup buyer the purchase price or terms of your offer unless all parties agree to the disclosure nor can he disclose to you the amount of the backup offer and terms without the other party’s consent.

By doing your due diligence you minimize your risk. It is impossible to anticipate every source of delay or risk. Conducting due diligence will cost you money and time. The customary way of conducting due diligence is to hire professionals to assist you. Attorneys, surveyors, engineers, environmental experts, zoning and land use specialists who will review documents, do inspections and make inquiries on your behalf during the due diligence inspection periods negotiated between you and the seller in your purchase contract.

When you want to buy land for development, you should think of your offer as consisting of two parts. Buyers and sellers often focus only on the price part of the equation and ignore the one that’s just as important – terms. In fact, the terms and conditions that are included in the land development offer can be even more critical than price. Why is that?

There are several reasons. People buying land need to have contingencies built into their offers that allow them time to get certain things done. Land developers typically want the ability to walk away from a deal when they learn new “adverse” information or when something else happens that, in their opinion, lessens the viability of doing the deal. Terms and conditions in land development offers address the purchaser’s bottom-line concern: I want to be able to get out of this deal if I can’t do what I want with this property or if the deal no longer makes sense for me.

If you’ve read my previous article (“Due Diligence for Real Estate Investing: An Overview”), then you know that virtually everything land investors need to find out about a property has to be investigated because it isn’t readily apparent or visible. Doing or not doing the deal can depend on the facts uncovered by your investigation. As a result, due diligence plays a huge role in the land business. So how do you give yourself the right in the contract to get the necessary information?

Land development offers provide for an up-front period of time, often 45-90 days from when the contract was signed by both parties. During this due diligence or feasibility period, buyers can do whatever investigation and testing of the property they want at their own expense, such as verifying the zoning, obtaining site-specific information (topography, floodplain, soils, wetlands, boundaries, environmental contamination and utilities) and data relating to the area (plans for future development and growth or property values).

At the conclusion, the buyers can continue with the next phase of the transaction or terminate the contract and be refunded any down monies if they’ve learned something that negatively impacts the feasibility of the deal. The purpose of this up-front period is for the buyers to get the information necessary to determine if the property can be developed as they want. Even if the buyer’s offer doesn’t contain any other contingencies, it will provide for this feasibility period, and if you think about it, it doesn’t make any sense to buy land without knowing all of the material facts.

Other contingencies in the land development contract generally depend on the scenario contemplated by the buyer. For example, if the property is going to be subdivided, the contract might state that the purchase would be conditioned on the buyer getting a minimum number of lots approved by the municipality. Provisions for getting use approvals (such as a variance, special exception or conditional use) or an outright change of zoning classification would be included. Since the ability of the property to be served by public or private utilities may be important, the offer would contain language relating to getting the requisite utility approvals and permits.

Land development offers are not cookie cutter. They need to be customized to take into account the particular property and the buyer’s intended use. Accordingly, buyers don’t work with the forms customarily used in buying or selling houses. These forms simply wouldn’t be adequate for this type of real estate. Instead, developers employ attorneys to assist them in preparing the contract and modifying it as the situation warrants.

Land investors who want terms and conditions have to be prepared to pay a higher price for the property. Land owners who want to get the highest price for their properties need to be willing to give terms and to allow buyers the opportunity to work through reasonable contingencies. If they try to get buyers to purchase the land “as-is” (without any contingencies), they are likely to discover that there’s no market for their parcels, perhaps at any price. This doesn’t mean, however, that sellers should give buyers an open-ended contract (i.e., an unlimited amount of time to satisfy the contingencies). This is where land sellers would be very smart to retain a “real” real estate attorney to guide them in evaluating land development offers and whether particular contingencies (and time frames for satisfying them) are reasonable and realistic.