Five considerations to help you make a successful real estate investment decision.
Envision the following scenario. You’re in the process of selecting a new location for your retail business. Your broker has just shown you a site on a prime corner. Your instincts are telling you, “This is the property!”
Not only are the area’s demographics a great match with your target market, but the site is near several successful businesses with high foot traffic, and the property’s lease rate (or land price) is extremely attractive. You’re tempted to have your broker write a lease or purchase agreement.
Before you take this leap, it is critical you take a step back and answer some important questions. With a career focused on project feasibility, I have assisted owners in developing millions of square feet across four continents. Here are the five questions I recommend asking for every project:
1. Does the site have underlying property claims?
- Entities that predate statehood | Most owners and developers understand the need to investigate any rights and land ownerships granted to First Nations or Native Americans. Less commonly understood are rights granted to entities that predate statehood and may impact development rights. Overlying claims on a parcel may include those of agrarian districts, utilities or railroads. Ownership interests in water rights or mineral rights may also prohibit development.
- Easements and encumbrances | Just because you purchase real estate, it doesn’t always mean you have full control, or that others don’t have claims or rights to the property. There can also be limitations on the owner’s use or transfer of the property. The majority of these issues should be recorded to the property title, but this is not always the case. A thorough review of historic documents archived on county or city websites, field condition reports and overlying agency documents is essential.
- Reciprocal easement agreements1 and development agreements2 | If your business will be part of a development, it is in your best interest to familiarize yourself with any restrictions imposed on construction, maintenance and/or operations by
underlying agreements. These restrictions may be imposed directly between parties within the development, as well as between the developer and the authority having jurisdiction. Such constraints may impact design, construction or operations within the development and need to be part of your consideration.
2. What soil conditions exist on the subject property?
Soil improvements are the biggest risk factor to your project budget. Although most soil contractors will have a strong understanding of local soils conditions, soil can vary dramatically from site to site and geotechnical field investigation is prudent. Specific risks include:
- Bearing capacity | Specifics of your building program will dictate what improvements are required to either the underlying soils or to your building foundations. Be aware of additional costs associated with the import and export of soil material.
- Liquefaction | Soils likely to liquefy under seismic conditions require special attention. If soil reports indicate the possibility of liquefaction, special engineering may be required.
- Settlement | Certain sites are prone to settlement as underlying soils consolidate. How these soils are treated (treated in-situ, replaced or reinforced) can have dramatic impact to long-term maintenance of the site and building.
- Shrink and swell | High clay content can pose long-term maintenance costs if not taken into consideration during initial design and construction. Of special concern is differential movement throughout the site that can impact integrity of buildings and paving.
3. Have any environmental considerations been resolved?
- Existing contamination | Fully understand existing and potential sources of soil or ground water contamination. Long-term cleanup or monitoring may be required. Baseline reports identifying the source may be advisable to protect your interests if there are existing contamination plumes encroaching from adjacent properties. Naturally occurring conditions such as the presence of methane, radon or arsenic may require the addition of building systems that should be understood and accounted for during project budgeting.
- Imposed regulatory limitations | Local air quality districts and water districts can impose limits on production or sales volume tied to pollutant discharge levels. There may be regional, local or site specific constraints that may impact your business operations.
- Wetlands | Although this type of land area is widely recognized, the definition of wetlands varies across governing bodies, and can include existing drainage ditches and detention ponds.
- Protected species | Even previously developed sites can harbor protected species. Assess if the site is designated as a significant wildlife habitat, which can have seasonal impacts on construction
4. Are utilities available?
- Available capacity | Confirming utility availability is a critical first step in your feasibility process. Utilities may not be readily available or may need to be extended, which can have significant cost and schedule impacts to your project. Capacity shortages may be based on the requirements of your project or of other large projects in the near vicinity. Typical examples of this in today’s market include issues with storm water system capacity, domestic water pressure and potential for electrical service upgrades and extensions.
- Upfront costs | Installation costs can vary dramatically from site to site based on point of connection for existing utility services. Understand local utility rules in order to properly budget for off-site improvements required as part of your project.
- Long-term costs | Take into consideration what the long-term costs of utilities will be for the project. It can be a critical factor in site selection. In some cases, competing utilities offer differing rate options.
- Understand schedule impacts | Familiarize yourself with the process to design and install utility improvements and how they impact project schedule. The process to extend, install or relocate utilities can quickly become the driver to your project schedule. Understanding these impacts up front will drive better decision making and prevent surprises down the road that may impact your opening date.
- Energy rebates | Know what rebates are available. Energy rebates can be time sensitive and may impact design direction. Getting ahead of the curve on these will increase your chance of taking advantage of all available rebates.
5. Are there off-site considerations that will impact your project?
- Capacity of off-site infrastructure | Assessment of local and regional infrastructure should be considered. Consideration should be given to costs and schedule impacts of any off-site improvements such as traffic lights or road widening. An early assessment by a traffic engineer greatly reduces the risk of discovery of a fatal flaw later in the process, saving you time and money.
- Trucking and rail access | Location and quality of shipping routes have a direct impact on cost and reliability of transporting materials and goods to market. Know if there are any restrictions to timing of deliveries or frequency of service as this may impact backroom storage capacity and your planned logistics model.
Whether you’re a growing business looking for your first location, or a developer with an experienced real estate team that is conducting due diligence on multiple acquisitions simultaneously, the goal is the same: to make your next real estate acquisition work for you and your business.
Making sure all the above site selection criteria are thoroughly evaluated reduces financial risk and shields you from stresses caused by unforeseen complications. Such a checklist also allows you to move forward with confidence, knowing you have protected your board of directors, investors and key stakeholders.
When it comes to due diligence, the key is knowing the right questions to ask to get the answers you need. While I’ve provided you with my list of “must-ask” questions, every project has its own unique variables, requiring a myriad of details to be analyzed. If you’re considering a land development project, I highly recommend hiring an independent professional who specializes in project feasibility to put their expertise to work for you. Addressing all the assumptions and unknowns surrounding your site will ultimately lead to the delivery of a successful project.
1. Reciprocal easement agreements (REAs) are agreements that may influence the development of a particular site, including restricting, limiting or directing the type or extent of future development. They are commonly used for guiding the development of shopping centers. Understanding the impacts of any existing or planned agreements is crucial, especially if you are not directly engaged in crafting the language that will govern site development and usage.
2. Development agreements are binding agreements between the developer and the local governing authority and may impact development rights and requirements as well as conditions of usage. Understanding these upfront can prevent surprises down the road including identifying extraordinary costs or operational restrictions early in the decision making process.