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Purchasing the Land

 

The Purchas and Sale Agreement

As the development manager, you have to drive the land purchase and sale agreement (PSA) negotiations to contract execution.  PSA documents and negotiations can get lengthy and complex and both buyer and seller will likely have lawyers to help with (or sometimes make more complex) the negotiation process.  This process can get bogged down with back and forth between the buyer and seller, with multiple redline revisions of the PSA trading between the two parties.  After a couple of rounds of each side making their redline revisions, it is best to just get everyone on the phone to talk through and resolve the remaining issues. 

 

After you agree upon and execute the land PSA, the work on closing on the land purchase just begins.  In the PSA, you should have an inspection period (usually 30 – 90 days) to perform your due diligence before making the purchase.  During this time you have to make sure you are not going to run into any major problems with your development later because of issues with the land. 

 

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Collect Seller Deliverables 

The seller of the land will typically have documents on-hand that will help you evaluate the property.  Below is a list of some of those documents.  Ensure you put in your land purchase contract for the seller to deliver those documents to you after you sign the contract.

  • Any existing surveys (e.g., ALTA, environmental, geotech)

  • Old/existing title reports

    • showing easements and rights of way

    • showing covenants, conditions & restrictions (CC&Rs)

  • Utility service and capacity information

  • Tax statements/records

 

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Title Review 

Thoroughly reviewing the title is one of the most important things you can do before buying a piece of land.  You will typically get an old/existing title report from the seller, but you are going to have to order an updated title report/commitment from the title company.  The title company usually provides this title report for free, hoping they will make money on the title insurance policy premium if you close on the land purchase.  

 

Once you get the title report, send it to your lawyer for initial review, then you can dig into any title issues he flags.  Title documents can get huge, complex and difficult to review.  Let your real estate lawyer, and their paralegal, take the initial run at reviewing the title docs.  They do these types of title reviews almost daily and will be able to review the docs in a fraction of the time, and more thoroughly, than you could. 

 

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ALTA Survey 

You are going to have to, and want to, order an American Land Title Association (ALTA) survey before you purchase the land.  The ALTA survey will show:

  • Boundary/property lines

  • The acreage of the site

  • Easements

  • Rights-of-way

  • Improvements

  • Utilities

  • Access

  • Flood zones

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Unfortunately ALTA surveys are a little pricy.  These surveys usually cost in the $12,000 range, but can get a lot more expensive if the acreage is big and/or there are a lot of items on the land to survey.

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When you order the ALTA survey, you have options as to what you want the survey to show, and those options affect the survey cost.  Those are called Table A options.  There are several Table A options you are going to request because they show a minimal baseline of information about the land, but below are non-typical ones you may consider adding to the survey.

  • Topography.  This shows the useful information of contour lines on a survey, so that the developer and civil engineer can see if there are any significant drops in elevation across the site.  If there are significant elevation drops, you might need to install expensive retaining walls during the construction phase.  Unfortunately it's expensive to add topo to your survey because it requires a lot more field time from the surveyor.  

  • Utilities.  If you pay for this option, the surveyor will survey and mark the existing utilities on or adjacent to the site, to include capacities of the utilities.  This is valuable information to your civil and MEP engineers so they know if the existing utilities are sufficient to service your future development. 

  • Zoning.  You are going to do your own deep dive into the zoning on the land, but it is good to have a professional surveyor show the zoning on the survey to confirm what you believe the zoning is. 

  • Wetlands.  You as the development manager should personally walk the entire site.  If you see something that might qualify as a wetland, add this Table A option to your ALTA. 

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Check with your lender on what Table A options they might require on the ALTA survey.  The ALTA survey will be a loan closing checklist item and you want to be sure any lender-required Table A option are on the survey.  

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Finally, your surveyor will need the updated title report from the title company before he can finalize the survey.  The surveyor will request the updated title report, but preemptively get this to him as soon as the title company sends it to you to prevent any unnecessary delays on your survey delivery. 

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Utility Availability

During your due diligence period, you will need to confirm your land can be serviced by public and private utilities (water, sewer, electricity, gas, tele/data).  The development manager will usually get a "will-serve" letter for each of these utilities.  This is a letter from the utility provide stating that they will service your land with their utilities.  You just have to call the utility provider and ask them to provide the letter.  Your lender will usually list these will-serve letters as a loan closing requirement.

 

Related to utilities, you also want to ensure your land will be serviced with city provided fire department, emergency medical system (EMS), and police.  It is important to have these city services in place to get insurance on your property.  If the city fire department won't dispatch to your property because you are outside of the city limits, you are going to have a more difficult time getting property insurance. 

 

If a piece of land is not within the city limits, the city will usually not provide you with will-serve letters for water, sewer, fire department, police or EMS.  The city will usually require you to annex your land into the city limits so they can impose city property taxes on your property to help pay for those city-provided utilities and services. 

 

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Earnest Money Going Hard

Most land sellers are going to require that your earnest money "go hard," that is, become non-refundable, after your due diligence period expires.  The seller let you tie up his land while you did your due diligence, and having your earnest money go hard shows your commitment to close on the land purchase.  The amount of the earnest money, and when it goes hard, will be a major negotiation point in the PSA.  Earnest money amounts are usually large and are put into escrow.  The escrow company will deliver the earnest money to the land seller after the expiration of the due diligence period, so be sure you know you can close on the land and can develop what you want to develop before the due diligence period expires. 

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Figuring out if you can develop what you want to develop on a certain piece of land during the short due diligence period entails a lot of complex and detailed work.  Outside of the fundamental check to see if you can get the zoning and entitlements you need, you have to perform all the financial analysis and modeling to see what your internal rate of return (IRR) is going to be, to ensure you can line up your limited partner equity investment.  Establishing the development's financial model is beyond the scope of this website, but the biggest thing that drives the IRR is the development cost.  The biggest thing that drives the development cost is the construction cost.  You can't get a good construction estimate from a GC until you have decent design documents.  Decent design documents take a lot of effort, coordination, investigation, time and money to create.  You, as the development manager, will be overseeing the effort to create those design documents, getting the construction estimate, and giving your development budget to the financial analyst on your team to then calculate the IRR and line up the capital stack. 

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Close on the Land Purchase with the Construction Loan

If possible, attempt to close on the land purchase simultaneously with your construction loan closing so that you only have only one closing - not two.  Closings are a bit painful so you want to go through that process only once if you can.  Also, banks will charge more fees for two separate closing as opposed to one. 

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Pulling off one closing can be tricky because usually your land seller wants you to close on the land purchase ASAP, but you usually won't be ready to close on your construction loan until you have extensive design work complete, and the associated construction pricing for that design.  If you want to line up your land closing to happen in tandem with your construction loan closing, you need to plan for that in detail early on in the process and incorporate terms into your PSA to help you line up only one closing. ​

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Zoning

Validating the zoning of the land is fundamental before you close on the land purchase.  I discuss zoning in detail here.

 

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Environmental Survey

I discuss obtaining an environmental survey for your land here. 

 

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Flood Plain 

I discuss making sure your land is not in a flood plain in detail here. 

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Geotech Report

I discuss geotechnical reports in detail here.  Since a geotech report involves boring deep holes on the seller's land, be sure to get approval from the seller before this survey is conducted. 

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Next Page: Property Taxes

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