MONEY 13 - LAND DEVELOPMENT #1

THIS IS MY 13^TH POST ON UNDERSTANDING MONEY TOOLS

Land Development Part One

This is one of the more complicated and lengthy components of the real estate business.  We’ll separate the topic into parts.

Land development or improvement takes raw land and develops the land to be ready to turn to a builder. The requirements will be different according to federal agencies, state, county and city laws, but each is strictly controlled and enforced.

I have been involved with three major developments.  One was a “registered” project with the Securities Exchange Commission and money was derived by selling shares publicly in the project. The other two master planned developments were private, and money came from a few investors.  One was accomplished with a private placement, or Reg. D Exempt with investors who have a high net worth, in excess of $1 million exclusive of home and cars. A good real estate lawyer can advise in this area and draft the legal “private placement memorandum”.  If the lawyer feels it wise he can send the memorandum to the state’s Securities Exchange Commission to have it “Blue Skyed” for approval. The other project I started and own with my brother; we are the only two investors. Most likely a Limited Liability Corporation will be formed to protect the assets and liabilities to some degree of the law.

To subdivide can be as simple as taking one parcel, perhaps an acre or two and dividing once or twice, or it can be complex encompassing thousands of acres with various zonings.  Time frames can take from a few months to many years.

If you don’t already own the land but are buying land to develop the first step is a market study, and talk with the officials on the county and city level about the necessary steps. At the federal and state level the procedures are more general and uniform from state to state. They get more individualized as you get to county and city governments.

Now, you decide a purchase is a good decision.  In today’s economy land development has pretty much come to a halt except for certain locales. The reasons for this are: 1) the number of people and companies that have lost their developments to banks has flooded the market with low priced land.  Banks called in lines of credit that were being used for land development starting in 2008.  Developers are competing with this low priced land coming out of banks.

2) Bank regulations are requiring a “performing loan” which means you or a company need to pay principal reduction and interest on the loan from day one.  Well, most banks and bank regulators have never been in real estate development, and this is impossible. Money needs to be used for the development of land until it is ready to turn to a builder, it is all out-go! At that time, you sell land or build, and with the profit from sales you then pay the bank.

3) With the retraction of the economy there is not the same need for housing expansion and commercial/retail development.  Many people are “upside down” on their current home mortgages, therefore they can’t afford to sell their homes to buy a new homes.  Others don’t want to take a chance in buying a new home in a subdivision until they sell their current home, and in most places it is hard to sell a home right now.  Also, it is much harder to qualify for a new mortgage today.

With commercial/retail, people have cut back on their buying habits, not spending as much money, and buying more on-line from the internet.  To get a loan for a commercial/retail development you would need to be 100% leased with strong tenants.

We will continue from here with more blogs on the topic of land development.