Partnering with Seller on land development deal - Posted by Kevin (NC)

import · April 17, 2006, 10:04pm

Posted by ray@lcorn on April 19, 2006 at 10:29:02:

Kevin,

It’s hard to give you a ballpark figure for the engineering and approvals because so much depends on the local ordinance requirements for development plans.

The typical cost range for one county we work in is $1000-$1500 per lot for a basic survey and subdivision plat, not including any engineering for streets or infrastructure. Approvals there take about 90-120 days.

But in a neighboring town, right next door, we did a small (10 lots) subdivision that cost $3000 per lot for the subdivision map, plus infrastructure design (water and sewer) of $25,000, and it took over a year to get approvals for a by-right use (i.e. no zoning change needed). Obviously it takes some hefty profit potential to justify the brain-damage factor in that type of locality.

I’d suggest calling a local engineering firm that is familiar with the local regs and approval process. Describe what you want to do and ask for a rough estimate in dollars and time. I prefer to work with small firms rather than the large ones. They’re typically cheaper and much more responsive.

ray

import · April 17, 2006, 10:04pm

Partnering with Seller on land development deal - Posted by Kevin (NC)

Posted by Kevin (NC) on April 17, 2006 at 22:04:24:

Greetings Board!

I have found a seller with a small parcel of land (3.50ac), which I think is perfect for a small residential subdivision. The engineer says he can get 5 lots out of it. In addition to surveying and engineering costs, we will need to build a driveway/road to access the lots and secure permits for septic.

The seller is open to any kind of offer, including one where she stays on as a partner. I would greatly appreciate any thoughts you all have concerning what I should propose. My inclination is to propose that we set up a LLC, deed the land to the LLC and then apply for a modest amount of financing to get the site subdivided and lots ready to sell. Is a LLC even necessary for this type of arrangement? The other issue I’m struggling with is what to offer the seller for agreeing to do this. Any thoughts? Should we assign a value to the raw land, which constitutes her investment to be paid back as lots sell, and then split the rest 50/50?

I would love to hear from anyone who has done this sort of thing before. I’m sure Ray has experience with this. I’d love to hear from you Ray!

Thanks,
Kevin

import · April 18, 2006, 2:12pm

Re: land development deal - Posted by ray@lcorn

Posted by ray@lcorn on April 18, 2006 at 14:12:29:

Kevin,

My first development project was a very similar situation.

First, let me point out that you are almost always better off using debt than taking on a partner. Partners are the most expensive source of financing of all, and you give up some degree of control as well. Debt is much easier to deal with (when structured correctly), and much cheaper to boot.

However, getting the engineering done, septic approval and subdivision approval will take some time. You didn’t mention zoning, so I assume it is in compliance. If not, then you’ve got another hurdle to clear. For that reason it’s preferrable to structure the debt so that it doesn’t have to be serviced until there is revenue to match.

If your seller is amenable to any arrangement, then I would prepare a contract that is contingent on obtaining the necessary approvals and subordinated seller financing. Once the engineering, septic and subdivision approvals and permits are obtained, then you would close on the land purchase.

At closing you (i.e. your entity) would give the seller a subordinated note secured by the real estate. The note would be subordinated to the primary development financing and will be paid off, along with any accrued interest, pro rata as the lots are sold.

This structure allows you to control the land, get the approvals, and use the land as equity for the development financing. The seller is secure at all times, and your work actually increases the value of the property at no risk to her. Assuming the price of the land is in line with the economics of the deal, this is a win/win for both of you.

ray

p.s. for an excellent overview of the ins and outs of financing land development projects, see this article by Mike Myatt: http://www.pacificsecuritycapital.com/index.cfm?action=hom.data&pageid=354

import · April 18, 2006, 9:23pm

Re: land development deal - Posted by Kevin (NC)

Posted by Kevin (NC) on April 18, 2006 at 21:23:53:

Thanks so much for the advice. I really like your idea regarding the subordinated financing…I’ll see if she bites on that one.

One question: How much out-of-pocket money do you think I’m looking at to get the engineering, septic and subdivision approvals/permits before I bring in the bank money after closing. This is not a big development, by the way–5 or 6 lots on less than 4 acres.

Thanks again, Ray. Great advice. I’ll check out that article.

Kevin