From four lots to 40,000 green acres, the fundamentals of land acquisition apply long before the buy.
Some things never change at McStain Neighborhoods. Walking land before buying it is one of them. Following the example set by McStain founders Caroline and Tom Hoyt 30 years ago, CEO and president Eric Wittenberg points out development and planning details of the High Plains Village project in Loveland, Colo., to Chad McWhinney of McWhinney Enterprises, McStain’s development partner on the project.
What do a rare bird, an angry mob, a traffic jam and a knee-deep puddle have in common?
All can kill a land deal. Habitat protection, community sentiment, transportation issues and water regulations can delay or deny a housing project. But know-how and diplomacy can overcome such challenges.
Land development requires a mix of instinct and intelligence from the first step - finding land. And if a project is delayed, it takes sound judgment and even sheer guts to decide whether to keep fishing or cut bait.
To buy the largest parcels and navigate long approval cycles, national builders bring world-class analytical tools and economies of scale to bear. Small builders can achieve comparable margins through market familiarity and by moving with agility.
So whether a project involves four lots, four city blocks or 40,000 green acres, any builder can win in the land game. But to do so requires doing the homework long before doing the deal. These 10 tips can get you started.
1. Walk the Walk
Successful builder/developers take the term "walk the walk" as a literal first step. A firsthand view helps identify potential problems and opportunities.
Eric Wittenberg, president and CEO of McStain Neighborhoods in Boulder, Colo., never buys land without walking it and studying its attributes. "I also drive around it in ever-widening circles. You learn a ton that way," he says. "I know a lot of people who have bought land by looking at maps. That's a big mistake. There could be a nuclear power plant or some other undesirable feature a few blocks away. And just the opposite can happen - you may find a gem of a lake, connected by a trail right to the land, that's off the map."
Tom Stephani, president of developer Rosenthal Co. and its building arm, William Thomas Homes, in Crystal Lake, Ill., jokes that his dog found the parcel for his first master plan. The companions "walked and walked" to sniff out what would become Dole Crossing, an enclave of 27 detached single-family homes in Crystal Lake.
Once they find a promising parcel, builders need to determine its ownership. A friend referred Stephani to the Dole Crossing landowner. "It's amazing how many people will help you if you just ask for help," says Stephani.
Next, get a current survey and secure accurate zoning and legal description of the property. Unknowns can remain, however, particularly with infill sites. In Stephani's case, neither the landowner nor city hall knew of the coal conveyor and heating equipment buried beneath a 1-acre greenhouse built in the 1920s. Another builder, excavating an imploded building, pulled a Volkswagen Beetle from the foundation. Even seeming greenfield sites can turn up environmental or archaeological surprises.
2. Find Small Sites on Web Sites
Some builders find land by letting their fingers do the walking - on a keyboard. In addition to brick-and-mortar real estate agencies that retail conventional properties on their Web sites, the Internet is brimming with foreclosure properties from private and even government sellers. The parcels typically are less than 10 acres, but sometimes lots are contiguous, although one lost bid could spoil a field of development dreams.
At one point in April, Elko County, Nev., listed 328 tax-defaulted properties at www.bid4assets.com, with minimum bids at $400 and $600. eBay is filled with real estate listings, including those from other sites such as www.governmentauction.com.
In Chicago, Taxbiz.com attends Cook County auctions of tax-defaulted properties every two years and collects as many as 2,000 tax certificates, turning most into properties with clear liens. Once Taxbiz.com wins its bids, it offers property online on a first-come, first-served basis. Buyers pay half the tax lien upfront, and after a period in which the in-default owner may pay the back taxes, the builder gets either a returned deposit or the land. Foreclosure usually results, with land typically sold for half the market value or less. Other online companies offer similar deals on tax-defaulted property.
TaxBiz.com buys tax-defaulted land in Cook County, Ill., at auction and resells it through the Web and normal brick-and-mortar means.
3. Assemble Team Players
Once a parcel proves worth pursuing, develop a due-diligence team of in-house and outside experts to evaluate various aspects of the property, from the dirt on the ground to that of the political variety. Topics to be addressed fall into these categories:
Physical: the land's natural attributes, which affect if, what and where development can occur
Governmental/cultural: regulatory and political factors, and the social context affecting them
Marketing: buyer demographics/psychographics and the product mix
Transportation: traffic, transit and access issues, from regional to subdivision levels, and accompanying infrastructure
Experts who can help include surveyors, landscape architects, land planners, market researchers, lawyers and lobbyists. Mark Friis, president of Rodgers Consulting in Gaithersburg, Md., advises land newcomers to seek assistance from local chapters of associations such as the NAHB or the Urban Land Institute. "These groups have committees that offer lots of information and regulatory help, and they're good places to find referrals."
Which experts will offer the most help will vary by project. To avoid an annexation, a lawyer might be key in negotiating a boundary agreement. "Towns know the process well," Stephani says, "so have an experienced attorney on hand if this comes up."
Regardless of the issues, mobilize the due-diligence team as soon as possible. "It's crucial to start early and take care to find the right civil engineer, the right land planner, the right soils engineer," Wittenberg says. "They all have to work together before you buy the land. A builder who doesn't understand his costs before he commits won't be in the business for long."
Steve Kellenberg, a principal with worldwide planner Edaw Inc., cites one project for which three sets of plans were created before a consulting biologist was hired. "The biologist torpedoed all the work we had done. Probably $50,000 worth of work went down the toilet because the developer put the team together incrementally."
Local knowledge also matters. Erik Pfahler, vice president of builder New Urban West in Santa Monica, Calif., says it's easy to form a team at home in Los Angeles County, "but if we want to go to San Jose, an instrumental part of any land acquisition will be getting to know the people who know that area best. Network as quickly as possible if you're breaking into a new area."
4. Leave No Stone Unturned
The team should provide a preliminary physical analysis that suggests area-specific land uses - flatter stretches for higher-density construction, for instance, or areas best left as open space. This suitability report "lets the land speak to us about what it wants to happen," says Kellenberg, who identifies these components of physical analysis:
- Vegetation, whose aesthetic value might be joined by ecological or community significance
- Habitat, which can contain protected animals or their migration path
- Soil types, which can dictate construction techniques
- Faults, landslides and other risks that affect what the land can carry
- Topography, which can dictate lot location, yield and open space
- Hydrology, including the quality and quantity of natural water flow
The Army Corps of Engineers traditionally has water jurisdiction over parcels that carry water across state lines but backs away from isolated intrastate waters. Builders' land teams must make calls and draw paperwork early to navigate water jurisdictions.
With this preliminary research, a builder can size up a few lots in a few hours or 20 acres in two days barring ecological complications.
Terramor, the fifth phase of master-planned Ladera Ranch in Orange County, Calif., represents "the highest level of green building on a large-scale project," says Edaw's Steve Kellenberg, the planning consultant for developer Rancho Mission Viejo. Market analysis included psychographics from American Lives, which identified Terramor's target buyers as Cultural Creatives, an upscale, idealistic group representing 24% of the nation (see Psychographics 101, September 2003 PB). The resulting marketing pitch told consumers their homes could "reflect concerns for renewable resources, energy efficiency, personal comfort and individuality. More than a place, Terramor is a lifestyle aimed at fulfillment through your relationships to home, neighbors, village and the natural ecology of your world." In November 2003, more than 18,000 attended the two-day grand opening of Terramor, where homes start in the high $300,000s and exceed $1 million.
5. Know the Demos and Psychos
Knowing where to buy and what to build requires a sense of the market and its home buyers. Demographic and psychographic research can reinforce or refute builder intuition.
Demographics include common census data such as age, income, ethnicity and home buying behavior. Private research firms add more specific market intelligence. Psychographics characterize the lifestyles and buying motivations of market segments.
Beazer Homes' Colorado division purchases demographic and market data from Houston-based Metro-study and Meyers Group in Costa Mesa, Calif., and psychographic analysis from Claritas in San Diego.
Peter Simons, Beazer's senior division president in Colorado, says psychographic analysis "gives us a good idea of people's spending habits, where they shop, what they eat, whether they wear jeans or a tie, and what they want in terms of lifestyle."
Builders can pay pocket change for some research services, a few hundred dollars for others and thousands for full-scale systems. Simons says the key is having in-house expertise to filter, analyze and make the data actionable.
6. Hit the Roads
"Traffic and transportation issues are among the biggest levers communities use to kill development projects," Kellenberg says.
Builders should check with traffic jurisdictions to find out if a ceiling exists on the number of trips a site or road may generate, which can affect the feasibility or scale of new development. Such information often can be found in public documents or through informal calls to city planners. "For the shortcut early indications, find the transportation planners or traffic engineers who are experts in that city," says Kellenberg. "There's always one who does the most modeling and knows the issues." A good due-diligence estimate can be had within a few weeks for a master-planned community, he says.
On a smaller scale, access issues can affect lot location and orientation, and even setbacks on individual lots. "Every project needs good access," says Tom Kopf, a partner with community planner DTJ Design in Boulder. "Without it, the builder will have to pay for it, so we always find out whether the surrounding street system can support the proposed development."
Be alert to city officials or outside parties who might see a development bid as a blank check to upgrade existing roads, parking or utility lines. Recapture agreements, in which a local jurisdiction reimburses a developer for infrastructure if other builders access it later, also can apply. "The builder coming in pays not only the cost of the other guy's improvement but also the interest carried over three years or five years or 10," Stephani says.
Be wary, too, if new infrastructure will be required. Communities have been designed with narrow streets to create child-safe, pedestrian-friendly neighborhoods only to have the city order them widened to accommodate emergency vehicles. Or oversize roads might provide great access but also mean higher costs for higher-capacity drainage and regulatory headaches if storm-water runoff is excessive.
Last fall, Pulte Homes acquired 334 acres of raw land in Olney, Md., for a 585-unit Del Webb community despite stringent state and county regulations and overhead power lines bisecting the site. The land plan, by Rodgers Consulting, awaits preliminary recordation. To court Montgomery County's favor, Pulte and Rodgers proposed preserving historic areas (which double as amenities), preserving and reforesting open spaces, and investing hundreds of thousands of dollars in water management. Rodgers also created a 50-page visioning book that explains the plan's benefits from the regulators' perspective. The book uses research from Pulte, the state, the Census Bureau and the Internal Revenue Service to prove a need for active-adult development. For instance: 89% of Maryland's population growth from 2000 to 2020 will come from the 55-74 age group.
7. Curry Political Favor
Wittenberg says McStain "probably will spend a quarter of a million dollars analyzing and getting a 600-unit plan entitled in Longmont [Colo.]. That includes our consultants drilling holes all over the site to see what the soils are like. It includes our engineers who are researching utilities, the legal fees to work on city documents - the whole planning effort." He says a good working relationship with city planners will keep that figure in check.
Don't underestimate the value of diplomacy. Visit the planning office, learn its processes, meet the planners and ask for an entitlement process checklist. Also, meet key elected officials who might have a stake.
Maryland is one of the toughest states in which to get land approved, having passed a Smart Growth Act in 1996 that enabled counties to establish urban growth boundaries. To protect the quality of headwaters draining to the Potomac River, Montgomery County, Md., also places a ceiling on the amount of paved or other impervious cover that land can have, but this ceiling has been a moving target for developers. Friis says it fell from 20% to 25% in the early 1990s to 10% today, "and now they're arguing whether to reduce that to 7% or 8%.
"There's doubt over how science-based all these rules are, as opposed to driven by emotion," adds Friis, who says approvals in Maryland can take 10 years. "We have headaches, but I usually have some certainty that if I follow the entitlement checklist and do A, B, C and D, I'll eventually get the final record plat and a building permit."
8. Love Thy Neighbors
Entitlement and permitting problems commonly are rooted in anti-development public sentiment. Community groups with different agendas can complicate matters further.
For example, before drawing final plans for his first infill project in an emerging area of Chicago, Pattison & Associates owner Jim Pattison met with the neighborhood association. "I asked want they wanted and what would be good for their neighborhood," recalls Pattison, who builds multifamily housing. They wanted a mixed-use building with affordable housing priced at roughly $180,000 per unit. In the same neighborhood, he met with a more affluent homeowners association that excludes renters. That group wanted lower-density housing likely to cost $400,000 or more.
The ward's alderman held sway over permits and was allied with the neighborhood group; the city planner for the area sided with the HOA.
"I jumped on board with the alderman and the neighborhood thinking it was the right thing to do," Pattison says, "and the homeowners association yelled at me for giving two units to the Chicago Housing Authority for scattered-site housing. Sometimes it's impossible to make everybody happy." A four-story compromise project won approval after 18 months, started construction in December 2002 and stands complete with two commercial spaces and 34 residential units priced from $199,000 to $399,000.
Pattison is in various stages of planning and permitting at least five more projects in that neighborhood. "If I get anyone too upset, they can block what I'm trying to accomplish," he says. "So it's important to go to all the meetings and talk with the people on all sides."
Community outreach can be formalized with a charrette. To plan a charrette, "treat it like a media event and get people excited about attending," says builder/developer Rick Holt of Holt and Everhart in Fairview, Ore. More than 75 stakeholders, including the fire marshal, the police chief, a governor's representative, neighbors and environmentalists, attended a three-day charrette Holt held in the 1990s to pitch a special zoning district that would allow him to carve 88-acre Fairview Village, a neo-traditional, mixed-use master plan, out of a 137-acre industrial site.
"We couldn't proceed with the plan unless we wrote new code," says Holt. "The charrette helped us educate the town's residents about what this 88 acres would be like. We had fabulous food, great presentations, and we provided little breaks where we gave encapsulated briefings on our progress." Street modifications and other preliminary plan details were redrawn at the event and presented to attendees, giving the community a sense of input and ownership.
The zoning district passed. Construction began in 1995 after a nine-month entitlement process, and all but four townhome buildings are built.
9. Make Sure the Dollars Make Sense
With an eye on risk management, crunch the numbers to predict the project's financial value. Kellenberg suggests these steps:
"Now you have at least enough information to decide whether the land is worth buying and how much you can pay for it," Kellenberg says. "Those steps are valid whether a developer is buying 3 acres in a redevelopment area or 3,000 acres of greenfield."
Next, determine how the project should be financed. Large, highly capitalized builders tend to buy a higher percentage of their land outright but also buy partially entitled land. "They're willing to pay a premium and take a lower margin in return for the lower risk of partially entitled land," Pfahler says. "They can afford to pay more than somebody like us."
That's why most small and midsize builders turn to options arrangements, which can be structured to defer rolling payments until agreed-upon milestones such as annexation, final plan/plat approval and phased subdivision closings.
"A builder/developer needs cash flow, and entitlements can take a long time," Wittenberg says. "In our case, it's maybe 18 to 24 months." In his entitlement bid in Longmont, Wittenberg says the landowner/farmer saw the benefits of "sitting tight with a sum of money agreed to at the outset of due diligence, plus four takedowns a year apart. And it's refundable. We can get out of the deal if we discover something unworkable. When due diligence is over, typically we put up more money. In addition, we make it nonrefundable, releasing it to the owner."
10. Know When to Walk Away
"When municipalities lay excessive fees on the developer," Stephani says, "the developer has to say, 'This land is un-developable.' Because the selling price the market will bear doesn't magically change if the city adds fees to it. Cities don't always understand that."
And sometimes public pressure can cause a builder to cut and run. "We passed on one piece of ground because we felt it would be controversial, " says Leisa Weintraub, vice president of development for Neal Communities in Bradenton, Fla. "It was a beautiful, wooded piece with a wetland area and a large lake, and it was surrounded by an established neighborhood. But it had access problems, and those people in the surrounding area were going to be extremely unhappy to see that land developed." Basic due diligence saved Neal from entitlement brain damage.
Cutting losses and moving on can be the smart move, agrees Ehud Mouchly, a developer for 30 years who's now with SunCal Companies in Irvine, Calif. "If you will face capricious behavior from outside forces and the development budget is tight, leave it!" he says. "If things don't go as planned, take a deep breath and abandon rather than throw good dollars after bad. That's a valid exit strategy."
Preliminary due diligence might seem daunting, but a little homework can go a long way. Due diligence typically accounts for only 10% of the time required from the start of analysis through final approval, says Steve Kellenberg of Edaw Inc. Entitlements and approvals take up at least half of the total time, with the interim devoted to planning.
Within due diligence, Kellenberg says preliminary work often takes a month or two, although traffic and access estimations usually can be made in as little as two weeks. Environmental analysis varies from a few days for an unopposed greenfield site to months of testing for a brownfield.
Land-planning and entitlement times vary as well. "In some places we're working, like Texas, I can spend four months on a land plan, and it takes three weeks to get it approved," Kellenberg says. But years can drag on in tough regulatory markets on the East and West coasts.
Due-diligence time can be relatively negligible for local builder/developers such as Tom Stephani of Rosenthal Co. and William Thomas Homes. Developing a 27-home master plan in his hometown of Crystal Lake, Ill., Stephani already knew the land. Pre-application took him three to four weeks, staff review four to six weeks and public review eight to 14 weeks before final plans got approved.