Large scale land subdivision projects

[Account Closed]

Does any BP member has professional experience dealing with large scale land subdivision projects? I found very little information about that subject on the forum.

I've ran a few successful subdivision projects back in Europe (France) and developped some parcels in California, and would be interested in learning more about the subject.

These operations can if executed properly, be very profitable, but i have yet to confirm if it is feasible in the US, anf if there is demand for shovel ready lots. 

In my home country, land subdivision can be very lucrative as it usually requires little money down and the cycle is usually faster than construction (less than a year). It also bears significantly less risk than ground up construction.

On the financial side, lenders will usually only require 15%-25% down, but will ask above 65%-70% pre-sale before underwritting. Pre sale proceeds bring more equity in the deal and if that's not enough mezzanine debt can  be raised through crowd funding or other private lenders; as a result almost 100% of the developer equity can be cashed out if structured properly. These deals normaly need to be above $2million to make sense as engineering, utilities and road works need scale to make economic sense.

I am not sure if this deal structure would even be legal in the US, and if this type of projects would be profitable. 

Some places like Texas, Utah, Colorado have huge population growth, so i guess it could make sense in those places..

Any info welcome

[Bill S.]

@Account Closed in my previous life I worked for an engineering firm that served the development community. We did the engineering for your large scale land subdivision projects. The lending environment is much different here. It's been about 10 years since I did that work. At that time it required cash to buy the land outright, then you took the project through entitlement and sold the lots to builders. The process, depending on the jurisdiction, took anywhere from 18 months on up. Very risky proposition. There was some lending on land but in the last downturn, the banks got really burned so I'm not sure who is lending on land for development now. I'm sure someone is though. The other approach is to put the land under contract, and then get it entitled and round up buyers so that when you close, your bank account gets fat. The entitlement process can be costly so it takes money to fund that process. In addition, we have the added overlay of having to provide water. It is expensive in most cases. The biggest challenge is that each and every municipality or county is different. So what works for one parcel wouldn't work across the street.

There are commercial brokers that specialize in finding land for development. Find a few of those in your area and pick their brains. They can explain the ins and outs of lending on land and development of the land for the area they know.

[Jay Hinrichs]

@Bill S.  that about nails it.. the OP thought process won't work in the states.. you can't pre sell land that is not platted.. you can take reservations but you can't take their money.. now you can and we do get some non refundable EM from the national builders.. but that might just be up to 10% or so and that is after improvement milestones have been met.

Bottom line.. cash intensive.. time intensive.. some jurisdictions like maybe Texas you could get land development done in a year.. but on the west coast 18 months to forever is the time lines. And if your a VERY well cashed up buyer and have a very long track record there are some banks stepping back in..

I did two development loans in the last 36 months.. but my cash equity was 50% loan to cost.. but better than all cash. Had to have entitlements in place with appeals expired before bank would drop the loan.. and in our area U can't presell individual lots to owners.. in CA you can take a reservation but that is non binding and no money transfers.

However as you state is regional ,, then its county  ,  then its city  then its zoning overlays.. no one broad brush stroke can determine what you do .. must drill down.

[Account Closed]

@Bill S.

thank you for the input; 

Lending is indeed the biggest problem; with no financing the operation would be pointless.

I just read below that Colorado savings bank offers inexpensive subdivision loans; about 5% up to 80% ltc... but this sounds too good to be true

https://www.bisnow.com/new-york/news/construction-...

I see you are from Denvers; Since you have some experience in this business have you tried to look into the local land development market? 

I think Colorado and Arizona could be an attractive place for this type of investment, given the population growth and new sfh construction numbers 

[Account Closed]

@Jay Hinrichs

yes, all the banks anywhere in the world want to see the permits before releasing the funds; the difference is that in France it is usually a quick, simple and inexpensive process to obtain the permits and you can make it contingent to your purchase contract; that means that you will only invest the earnest money and the engineering / surveying fees, which are usually very reasonable. Permits are usually cleared in about 4 to 6 months and are free of charge.

The developer usually charges a 5% deposit to the buyers; once 70% of the lots are reserved the money is held in escrow but used as collateral / downpayment by the bank 

I hardly see any interest in running this type of development if it has to be financed all cash; any leveraged conventional investment in a rental or rehab would yield a much better cash on cash return with less risk 

[Jay Hinrichs]

Cedric.. first off there Is no such thing as free in the US.. some markets are less expensive but nothing is free.

its up to the seller of the property as to how they want to handle it.. in Oregon for instance.. we put up EM usually 25 to 200k depending on size.. but it does not go hard until we have preliminary approval.. that takes 12  to 18 months.

then you close on the dirt after that..

in CA when I was developing there the competition was such that you had 90 day due diligence and you closed.. regardless.

most builders are buying today what they will build on in 3 to 10 years from now.

in Oregon builders buy for the next season.

In Charleston same thing.. much quicker.. again depends on jurisdiction.

[Account Closed]

@Jay Hinrichs

The permitting process is insanely laborious, long and expensive here in california.

I really don't see how they plan to address the housing shortgage with so much redtape, processing delays, and outrageous fees

I just spent nearly 200k in engineering and studies for only permitting 2 new homes in Topanga, CA, and the plan check only will last one year and half

It took me more than one year to permit a simple warehouse in South LA in an industrial area

Now buying cash would make sense if you could double your money in 12 to 18 month after subdividing, but i have yet to find such deals 

[Dorothy Ma]

@Account Closed mentioned, difference municipalities have different regulations and code. In Denver, it's pretty hard to sub divide land- the current zoning code dictates the process and you have to make an appeal or variance to try to go outside of the code

[Jay Hinrichs]

@Account Closed  CA is tough especially so cal close to ocean or hillsides.. I have a 135 lot project I am doing in Oregon and about 350k will get me to pre plat approval and ready for bank loan. Of course final engineering will quite a bit more but that's after I have an approved project ..

[Account Closed]

@Jay Hinrichs

Why not; we definitely should discuss

I think Los angeles is the worst place to do new developments in the country;

All the architects i have been working with have confirmed that the city is the most restrictive in the country and that the LA bureaucracy is the worst.

After i exit the last 3 deals i have ongoing now, i'll be done with LA; the waste of money and time dealing with the city and its multiple agencies doesn't make any sense and has been hindering my returns for years.

The market there does not make sense anymore anyway; construction prices are through the roof, and the re prices have reached unsustainable levels;

I see stucco shacks selling for 500-600k right in south central, in the total ghetto. This cannot be right

I'll happily take my money and head to a low tax jurisdiction like Florida, Texas, or Ohio where prices are nowhere near the LA levels

[Jay Hinrichs]

@Account Closed  exclude Texas I hate working in that state  :)  never have done well there other two states I have made very nice money.

[Manolo D.]

Is it just only me or does everyone else like to think that the more difficult it is to solve a problem, the more money there is to make. I haven't seen a lot of shovel ready lots here but I have seen a 92 lot subdivision development, it was for a client of mine, i did the road and utility networks, the lot was seller financed, was free and clear from them, and the sale was contingent upon the approval of full permits, seller got a 3% deposit of land value and developer had 2 years to get everything done. Developer then had 2 more years to fully pay the lot. Of course this is another country like the OP.