What are people`s thoughts on land development not land banking as an investment? What are typical timebombs to watch out for?

[johnsu]

Hi Everyone,



Everyone always talks about JV's and rental properties on here. I think land is a great investment if done properly that is at least as good as residental rentals if "done properly".



I have no experience in the development side but I'd love to hear other REIN members thoughts and insights into this.

 

[Ken15]

I have developed vacant land in the past and present and here is a list of things that are required: (off the top of my head)



$$$$$$.... lots of $$$$$$.

Land development is very difficult to obtain financing so usually it requires lots of cash on hand.

You need to retain a Civil Engineer ~$180/hr, Geotechnical Engineer ~$150/hr, Planner ~$250/hr, Architect ~$150/hr, Lawyer ~$250/hr and a Surveyor ~$150/hr.

Typical "Studies" the City requires for development:

-Zone Changes

-Geotechnical Studies

-Archeological Studies

-Traffic Studies

-Parking Studies

-Noise Studies

-Storm Water Management Studies

-Servicing Studies

-Tree Saving Plans

-Surveys

-Lighting Studies

-Site Plan Approvals

-Concept Drawings along with tons of revisions

-Letters of Credit to the City covering all costs of the development to guarantee completion.

-Parkland Dedication or Cash in Lieu of Parkland $$$

-Any public roads, sidewalks, parks, curbs, stop signs, hydro poles, boulevard trees etc... are the developers responsibility for min 2 years.

-City Approvals, Regional Approvals, Conservation Authority Approvals, Hydro Approvals, Cable/Tel Approvals, Gas Utility Approvals, etc...

-TIME... Lots of TIME... I would budget 1 year minimum



Land development is usually a public process.... Be prepared for the NIMBY Mentality (Not In My Back Yard)



AND



God help you if there are trees on your property and they need to be cut down! People LOVE trees...



Just a few "timebombs" to look out for...

 

[bizaro86]

One thing to add to the very extensive list provided above is WATER.



Certain parts of Alberta essentially have no new water licenses available, so new developments have to find a water license from somewhere else. (IE Crossiron Mills mall in Balzac bought water from the Western Irrigation District, and Okotoks area has restricted development due to water issues)



Might be something to investigate before you start spending all the aforementioned $$$$.



Regards,



Michael

 

[johnsu]

Great info Ken and Michael! So here's another question to help people who want to invest in land but don't know if the company actually knows what they're doing. Just like Thomas Beyer says, "There's developers out there that are good at raising money but have NO EXPERIENCE OR EXPERTISE and go TATTA'S UP! Like Signature capital is a good example of that.



So what are some good questions to ask to find out if these people have the experience or expertise?

What are some responses that someone who "pretends" to know would say?

What are some resonoses that someone who "actually knows" would say?



REIN is fantastic for connecting and creating CONVERSATIONS around investing. USE OF KNOWLEDGE IS POWER! Learning is DOING SOMETHING DIFFERENT WITH THE NEW KNOWLEDGE!

 

[Thomas Beyer]

We're embarking on our 3rd land development project .. in booming Cold Lake, AB !



Besides expertise (in-house or hired) look for



a) going in price to developer - reasonable for area and type of development

b) price to you, the investor - any uplift .. i.e. is developer lining his pockets UPFRONT regardless of your profit ?

c) zoning and/or sub-division in place .. or zoning desired (and maybe a long time out or never ?)

d) timelines for development and $ payback

e) any (expensive ?) 1st and/or 2nd mortgages that have to be paid first before all development expenses and your profit

f) fees and equity stake for developer ? modest please .. but not too modest to create an incentive for him, too !!

g) absorption rate for desired product

h) price for builder / end consumer .. realistic for city/area ?

i) envisioned and realistic profit % .. taking into account all factors, costs, expenses

 

[bizaro86]

[quote user=ThomasBeyer]b) price to you, the investor - any uplift .. i.e. is developer lining his pockets UPFRONT regardless of your profit ?





I looked into a land development syndication, where the sellers were going on and on about the track record of their company, and how investors in their last 5 projects had average such and such (20%, I think) return.



What wasn't mentioned anywhere expect the fine print in a footnote at the bottom of page 47 was that the deal wasn't the same. The investors in the first few syndications had gotten a certain percentage of the upside, with no initial uplift. The investors in the current situation were paying an uplift, paying a management fee, and getting less of the upside.



So even if their current investments do turn out as well as the land they developed around edmonton in the middle of the 2000s, (which is unlikely, in my opinion) the investors will do dramatically worse since they aren't participating in the upside to the same extent.



Regards,



Micahel

 

[Thomas Beyer]

[quote user=bizaro86]I looked into a land development syndication, where the sellers were going on and on about the track record of their company, and how investors in their last 5 projects had average such and such (20%, I think) return.



What wasn't mentioned anywhere expect the fine print in a footnote at the bottom of page 47 was that the deal wasn't the same. The investors in the first few syndications had gotten a certain percentage of the upside, with no initial uplift. The investors in the current situation were paying an uplift, paying a management fee, and getting less of the upside.



So even if their current investments do turn out as well as the land they developed around edmonton in the middle of the 2000s, (which is unlikely, in my opinion) the investors will do dramatically worse since they aren't participating in the upside to the same extent.


You raise a few great points .. and one is "change of deal terms .. more in favour of developer" !



Many land developers are also VERY vague about actual costs of development .. and many firms do not disclose any budgets / assumptions at all.



I do believe that a piece of land in an area of growth, bought at market and developed speedily with care, no or low mortgages and low costs can make an excellent investment !



Most land deals fall apart on

a) costs that are too high





and the two biggies:



b) too highly levered (i.e. mortgages) that are too expensive .. especially in a delay due to city approval or slow absorption .. where interest costs accumulate and profits get eroded quite quickly often !



c) initial uplift that lines the developers pockets regardless of asset (or investor) performance !!!