Strategies for partnering up with a property owner

[Troy Whitney]

I'm looking for thoughts from anyone experienced in larger developments.  I'm in talks with a property owner who wants help developing a parcel.  It's currently zoned commercial, but there's a significant review and approval process you have to get through before you can develop anything in the Seattle area.   I want to spearhead the development process and get the project to the permit stage and am willing to put up some money, but I don't want to invest a significant amount unless I have assurances that I won't be cut out of a deal he decides to make with someone else down the road.  The fact that this review process can take a year or longer is what makes me nervous.  I've considered some sort of lease option, but my guess is the owner would want more than I'm willing to pay for the option.  My preference here is to partner with the owner, and he has suggested that he's willing to do so under the right terms.    So, if you have any thoughts on a way to structure such a partnership and protect my interests I'd love any feedback - thanks.

[Greg Dickerson]

@Troy Whitney there’s a lot of ways to structure this deal. First step is to find out what the owner wants for the property and if he’s willing to partner with you. Also who’s going to put up the entitlement money? Depending on the project it could be significant.

Next step would be to put together a contract contingent upon getting all entitlements for what you want to build. You do not want to close on the land or funding until you have all your approvals to build what you want.

Once you have an agreement you begin the feasibility and due diligence process. You determine highest and best use by analyzing the market and by talking to realtors, property management companies, appraisers, builders and developers in the area.

Next step is to do a quick feasibility analysis to determine if the project will work financially. You do this by calculating the NOI to help determine value and work backwards. You also need to look at the comps as well to validate your assumptions. Start with the potential gross income then subtract the operating costs to determine NOI, divide that by the CAP rate in your area to give you the value, then subtract development costs, building costs, commissions and interest expense. You want at least a 30% margin above costs and the NOI needs to be enough to pay the debt service after stabilization and then some.

If the project looks feasible from a financial standpoint the next step is to check with the city or county planning and zoning department to get an idea if your concept will work, if you can build what you would like to build and what is required for all approvals including site plan, building permits, proffers, water/sewer tap fees, bonding requirements, inspections, setbacks, lot coverages, parking requirements, height restrictions, C/O process and time frame for all approvals.

You also need to check with the utility companies and get an idea of availability and cost estimates from them for water, sewer, power, gas, cable, installation and connection requirements, tap fees, hookup charges, transformer location and relocation, power line and power pole relocation issues. Check to see if you have to install any manholes, fire hydrants, curb, gutter, sidewalks, street signs, street lighting any specific street design or access requirements, Check DOT requirements for access, stop lights and permits, traffic studies, DWQ requirements for permits, permit fees and time frames.

Once you have an idea of what you can build and what is required in terms of permitting and infrastructure you want to talk to some civil engineers, architects and commercial general contractors that do the type of projects and build the type of buildings you want to build so you can get an idea of costs, time frame and requirements.

This is a brief and broad overview of how the development process works what's required before you get too far down the road or purchase a property.