Real Estate Development Land Purchase

[Jonathan Orr]

Hi BP, I was trying to explain real estate development to a gentlemen who is interested in getting "in the game". I was explaining how I structure the purchase of land into deals and how I go about it.  It got me thinking of the question, how are other developers structuring their land purchases for development?

To better define a scenario, you find a piece of land you want to develop and build.  You need to go through entitlements and the land needs to be a traditional purchase (no seller carry).  Are you buying it with all cash?  Get a land loan? Wrapping it into a construction loan?  Etc...

Just curious what others are doing during this time in the market.  Not looking for lenders or "secrets" just wanted see how others are doing it.  Cheers!

[Scott Choppin]

@Jonathan Orr

My 2 cents....for projects in CA, you're are already doing it correctly (i.e. your NorCal deal), getting time to complete entitlements. You will likely find SoCal sellers a tad more patient. For reference, we've had deals in escrow as long as 4 years (don't ask, affordable housing deal with tax credits, super complex) 

Like Jay and Greg, we never close without entitlements. We'll close without RTI plans, although we're having conversations with OZ capital sources that want ONLY RTI, which is tough to find deals that are in that state and priced coherently to generate a feasible yield.

On land loans, we used to do those (lol) but I haven't done one in many years, and likely never will, just too much that can go wrong and bad timing in entitlements. Possibly there's a story for buying entitled land with land loan, but again what if things go wrong in this complicated business. Plus, land loans are always too costly in my book, although for the correct reason of more risk on a land only purchase. Land lenders know this and take advantage of eager developers to take the leap imagining that things "will work out" and they won't get caught short on timing to close construction and repay land note. Not my gig. 

To us, California is a total pain in the *** for entitlements, but I also say that has advantages if done with good strategy and discipline. Once you do have the entitlements you have a very valuable scarce resource. We have sold 5 major land entitlement deals over the years (+10M land sale price per project) and have always made excellent profits (maybe better than actually building in my mind) but we always got time to entitle before closing.

Our solution now...only buy sites zoned correctly for our product type, get the time we need (mostly, not perfect) and negotiate escrow extensions that you pay to extend with non-refundable. If seller in too much in a hurry, let them find the "greater fool", and you can live to fight another day...the seasoned developer's mantra. 

~ Scott