Securing plots w/ options for large-scale apartment development?

[Are Hvalbye]

Hi, guys!

I am operating on the other side of the pond (Scandinavia), but thought I'd take the plunge (pun intended) and give this question a shot as the principles of land purchase and development seem fairly universally applicable.

A suburban part of town close to the neighborhood where I grew up is undergoing a municipal master plan that paves way for rezoning and dense city-like development of apartment buildings. I have tracked down a small neighborhood in particular that is attractively located vis-a-vis public transportation hub.

It's in a district of a capital city that is distinguished by some of the lowest prices in the city (about 35% below average). Hence developers have yet not lined up, which gives an opening for an underling like myself.

In total we are talking around ten homes/lots that potentially (contingent on a multi-year rezoning process with a positive outcome) be turned into approx. 70-130 units.

Most of the homes are owned and occupied by couples/professionals in their 30s and early 40s. There is one (half of a) duplex in particular with a fairly significant lot size that is owned by a 75yo. woman and used as a rental. My plan is to approach this individual directly about purchasing the home personally.

An outright purchase of all properties at prevalent market prices would entail a total investment of 7-8MUSD. Given a hypothetical scenario with 70% debt funding, you are looking at fairly slim gross rental yield of +/- 10% on capital invested (ROI) - contingent on an unlikely 0% vacancy. In other words, it is not an attractive proposition to acquire and sit on these homes through multiple years of bureaucratic tail dragging.

The obvious choice is to negotiate call options on the various homes individually, as not to tie up any significant amount of capital up-front.

So, the question is what is the most tactical approach towards homeowners about a collaboration and future sale? What makes most economic sense in terms of the option strike price/valuation benchmarking, general contract structure and other terms?

Personally, I am thinking that any metric that involves possible future buildable square acreage can be perceived as confusing and potentially make homeowners approach other developers for validation. My best idea as of now, is a five-year option/pre-emptive right that offers e.g. a 20% premium on current appraised valuation adjusted for future home price development (i.e. seller will receive an additional 30% over present value, if prices rise another 10% before the option is called).

The option premium/price would be the implicit architecture fees required for a rezoning project of this scale.

Have any of you had experience with these types of processes before? Any particular dos and don’ts?

Greatly appreciate any feedback you may have.