Land Development Project Underwriting
In working on your real estate development project, you will need to underwrite your land development costs, either for a stand alone land project, or in making assessments of the land component of your new construction apartment project. Below is a methodology for determining the cost of land development for any given project.
Generally, every parcel of land is different. This seems an obvious statement, but as a real estate developer, it’s your job to make effective, rigorous, and thorough assessments of all the (or as many as you can) variables in a project. Below is a way to underwrite, gather, and analyze a land development deal. Please pay close attention to the methodology I lay out below, as it can be used on all facets of any real estate project you work on and apply to any component part of the organization of a real estate project:
Two reasons for doing it this way:
My methodology is to have a set of practices that take any differences between regions, or between specific land sites into account, a fundamental way of looking at a site development or building project and making a thorough and rigorous assessment, even when you don't know what's different.
As an example, the general specifications for site development in California versus your local city/county are different, and they’re different everyplace. They are different due to regional differences in the engineering specs for the utilities (i.e. one type of pipe spec for sewer in California, another somewhere else), the road design: do they require you to build curb and gutter or do rolled curb, landscaping and parkway specs, etc. So I could tell you it's 50k per lot for land development and that's a good number here is California, and a bad number in, say, Michigan.
As well, your site may have different characteristics than mine. You may have hills, I have a flat site. Yours has trees, mine doesn't. Yours has nesting owls, mine has Bluespotted Butterflys. Yours has no blue line stream, mine does. On and on and on. Each situation will drive a different cost structure.
Think of it this way, the site on the east side of your city can and will be totally different from a site on the west side. Same city/county, same market, radically different cost structures. Radically different costs structures show up in your proforma model, and your actual project costs. The work you do upfront to gather information about cost variables has a real consequence.
I want to get everyone thinking about how to fundamentally approach gathering costs for a specific task or project: such as how much for site development costs, how much to build each house, or the development impact fees required to be paid. Fundamental practices, actions of underwriting and gathering info on deal, and a flexible, open and dynamic approach to the details in that particular deal. Fundamental system, flexible approach to details.
So I always approach it from a flexible perspective, meaning I don't assume a cost in one area is a cost in another area, they are probably different. But fundamentally I know these costs for land development always exist, in all markets at all times:
Underground utilities, wet and dry
Roads, sidewalks, curb and gutter, signage
Drainage, i.e. the building of detention/retention basin, spillways, and/or underground drainage structures (usually under the street).
Development impact fees related to land (does not include the fees that you'll pay to build each house
- Park fees
- Traffic fees
- Drainage basin/district fees
- Water basin/district fees
- ANY AND ALL OTHER FEES THAT EXIST (see below, ask and ask and ask) WHATEVER THEY MAY BE
- Design and engineering costs
- Plan check fees for your final plat map and engineering plans
- Planning application fees if processing a zone change or general plan amendment
- Environmental studies, investigate endangered animals and plans
- Phase I, II, and III environmental studies, i.e. toxic and environmentally impact soils conditions
The most important thing to remember, is that this is and must be a flexible list, not fixed and objective. Always be looking for what's not on the list, what's left out, what's missing. That's usually where people get in trouble, the costs that were forgotten/missed/didn't know about.
So you create a spreadsheet for your own internal use, and then call the folks who know these costs cold and begin you information and cost gathering.
Using this checklist system, I could go into any new project location and do a relatively complete underwriting knowing nothing of the local requirement or costs structures. I would call land brokerages firms, civil engineering firms, the local city/county for fees, construction companies for utilities, road, sidewalks, grading, etc. In many markets, there are companies that specialize in the preparation of feasibility studies for land development costs. In some cases, land brokers may have this info from past deals that they worked on. Be careful, the data may be old, the broker may be giving you bad data (nothing like a low land development budget to make the high price for the land purchase look reasonable). Always, and I mean ALWAYS do your own independent analysis. I promise you it will save your butt.
One tactic I use is to always ask everyone you talk to: What am I missing? Is there anything I did NOT ask you about, a fee, a cost, a unique issue (politics, process, fees, soils type, water table, endangered birds/bees/bugs/lizards/owls, etc).
This is not perfect solution, but the main issue folks run into is they don't ask enough people broadly, and then question these people enough deeply.
Ask a million questions, ask everyone, everywhere, all the time. If your driving people crazy with your questions, you’re on the right track but just getting started.
Scott Choppin is the Founder and CEO of the Urban Pacific Group of Companies, which is focused on urban infill real estate development and real estate development advisory services to external companies and commercial businesses.
Urban Pacific was founded in 2000, and focuses on the development of multi-family rental projects throughout California and the Western United States. Urban Pacific has developed real estate projects with a total historic deal valuation of over $900M.
Urban Pacific also provides real estate development advisory services to commercial businesses, such as the San Pedro Fish Market, to facilitate their real estate development and construction management needs.
Urban Pacific is based in Long Beach, CA.
Scott Choppin lives in Long Beach with his wife of 24 years Rebecca, where they are raising the 4th generation of the Choppin family in Long Beach - Sean Patrick, Dylan, and Jenna, ages 16, 13, and 10.
Follow Scott on: Twitter @ScottChoppin LinkedIn linkedin.com/in/scottchoppin