How to protect confidentiality during a revelopment opportunity

Question

I am interested in purchasing a building with a plan to add a 2nd storey for apartments, which may be possible with a zoning variance.

The building is not on the market and relatively few people are aware it will soon be sold, and I have something of an inside track to the owner through a friend. It's in a high-demand area and would be a profitable deal if zoning approves. I think my plan for the property would be better for the neighborhood and a good case could be made for the variance.

Would it typically be advisable to just make an offer contingent on getting a variance and then after offer is accepted, explore the possibility of a variance with a township or attorney? As opposed to investigating and asking questions beforehand. I'm concerned that even speaking to the township or an attorney about it could lead to the wrong person being tipped off and create competition for the property.

I realize this is all specific to my case, but does anyone have any experiences or thoughts that could be relevant to this scenario / on the order of operations and how to best proceed?

Scott E. · Answer

Q. Would it typically be advisable to just make an offer contingent on getting a variance and then after offer is accepted, explore the possibility of a variance with a township or attorney?

A. Yes, absolutely. The purpose of your due diligence / feasibility period is for figuring out things just like this. I know a guy out here who has done a couple of office to apartment conversions. He asks for a 12 MONTH feasibility period on those deals, because it takes about that long to go through the entitlements and rezoning process.

Patrick William · Answer

Thank you. Yes I know it's no guarantee by any means, especially in this town which has a reputation for being tightly regulated. There's no one I distrust particularly, but don't have anyone I particularly trust either. This would be my first foray into bigger 'developer-style' projects, previously have only worked in smaller multi-family renovations within the existing structures.  I'm leaning towards making a cash offer to the seller with a short-term contingency to explore basic feasibility. If it seems like a good chance it could succeed, it would move to a longer feasibility period/contingency-on-variance and we would take the risk in hiring an attorney, potentially an engineer/architect, etc. Otherwise we would be able to back out of the deal quickly with no penalty, say in 15-30 days or thereabouts. That's just my uninformed/inexperienced idea but it seems sound enough.

Justin Hammerle · Answer

@Patrick William - This problem is typical, prior to agreement make sure you have a group of professionals (engineer, atty, etc) that you trust and work with regularly to analyze the feasibility and give you feedback.  If you don't have anyone you feel is trustworthy, you can utilize NDAs.  Certainly would recommend to include all approval contingencies needed to get a shovel in the ground.  You can lose a lot of money if you are on the hook to close on a project that is not fully approved.

just a disclaimer that a zoning variance is not an easy lift

Patrick William · Answer

Thank you for the info. I was unaware of the term feasibility period. So if I understand correctly, the buyer makes an offer / signs a purchase contract with the condition that zoning approves the buyer's development plan, and if approved, the buyer is obligated to buy / seller is obligated to sell, as with a residential contract?

Is there anything that is done to protect the seller in the event that the buyer loses interest and makes up excuses to scuttle his own deal and back out of it? I know this can happen with any real estate transaction. I have no plans whatsoever to do that, just trying to get a basic grasp how both parties are protected while the potential buyer goes through the risk and expense of due diligence/rezoning, and the seller holds the property off the market.

This is  a little different than a typical office to apartment conversion since the underlying zoning is residential and there are multiple lots involved that are currently sitting under a single business/use. As long as the township approves, it's fully workable, but approval seems far from a guarantee.

Scott E. · Answer

All very good questions.

I recommend you get in touch with a commercial real estate broker, and a land use attorney (also sometimes called a zoning attorney). They are going to help you navigate all of the things you are considering. I know you are trying to keep this thing "under the radar" but you need some local experts to help you out with this complex transaction you are considering.

Here's a link to a local group who does exactly what I'm talking about. Not sure where you're located but you will want to fink a similar firm - link

Patrick William · Answer

Thanks. I have some experience with residential offer process but not much with commercial. What I meant is to make an offer contingent on getting the variance, just as a home offer would be contingent on inspection. That way even though I have no guarantee that the rezoning will succeed and might lose money trying for rezoning, if it does succeed I will have a right to the property. I'm assuming that's how it has to be done normally, or buyers would not go to any expense.   I own a property close by and have a fair idea of this property's value, what he would ask for on MLS, and what his bottom-dollar number might be. I have a partner who would be able to pay cash for the property so there would be no questions around financing. So seller would save money and time versus listing with realtors, etc.The property is mixed-use with about 80% commercial use, and for a few reasons would not be a very attractive of a deal for a business who planned to continue that use; its main value by far would be redevelopment, but it's fair from certain this town would permit it.

Barry Ruby · Answer

@Patrick William

Hi Patrick,

Your concerns about confidentiality are valid as is your question about priority.

It would be unwise to make an offer to purchase the property without having a fairly good idea of its current and built out value.

Valuation can be established by running the numbers for each scenario to get a sense of deal performance.

At the same time that you conduct underwriting, you can do a “soft” probe into zoning regulations to confirm the ability of getting the deal permitted.

The situation requires you to do a bit of a dance between site control and vetting it for feasibility and performance.

Let me know if you need any help with doing the tango.

How to protect confidentiality during a revelopment opportunity

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