Strategies for working with landowners to partner on development.

[Corey Meyer]

My investment Portfolio is in Big Sky, Montana.  I actively invest and manage STRs here and am looking to grow my portfolio.  The most challenging aspect of investing here (besides high prices) is that there is very little inventory as Big Sky is one of America's newest cities.  There wasn't a single home here before 1968!  Since the city itself is just being built there are very few options for me to increase my portfolio of buy and hold. 

I am seeing a large increase in demand for STRs here and am contemplating developing solely for the purpose of creating a perfect STR. I am not a developer but I believe it is in my wheelhouse. I have colleagues that are Architects in Bozeman, mentors in Big Sky that are developers, and I am connected to most of the pieces of the puzzle for developing a lot. However, I don't have the capital to buy a lot here, only enough to build.

There is a lot in town that is For Sale by Owner.  Is there a way to pitch them a partnership long term Buy/Hold?  The seller might potentially be interested in partnering and making a greater return on their investment by developing their lot....?  

Thoughts? 50/50 Split?  

Corey

[Michael Rutkowski]

If you're asking for a 50/50 split, they're going to ask you to develop that for them, and will ask about your background and expertise. That's going to cost hundreds of thousands of dollars. That's if everything goes well. If you need to hook into the sewer, it will cost more. No one is going to do work for free, and you won't need an architect, unless you are building the homes, but you will need a surveyor, a civil engineer, a structural engineer, a land use lawyer, at least 10 different contracting companies, and probably much more. Keep in mind that these people are probably getting an offer every week to develop their lot, but probably can't as they have a lien or mortgage on it. This is something that you need to research on your own before even approaching them. I approached a guy in Churchill to buy out his restaurant and home. We had 2 visits, negotiations, and THEN I checked the property in the Courthouse, and saw it was being foreclosed on... So do your homework.

Some advice about development though:

Check to see where the water table is or if there's a riparian habitat nearby. Just because there's land doesn't mean it's buildable. If the water table is within 4 foot of the surface, forget about it, it will never be approved by DEQ, and will need a public connection to sewer, and Big Sky is probably going to slap you with a SID at this point, because it's infrastructure is present and being used in most places I know of.

Do not approach ANY engineer in town without a Land Use lawyer. Engineers will do what you say, but it's really not their responsibility to know whether or not your project will work out. You can finish up with them and have some colorful awesome looking plans, and then the DEQ in Bozeman will just deny it all.

Price out infrastructure like roads, lights, fire hydrants, treatment systems, before you even approach the owner. You will quickly see in most cases, it is impossible to do without some major financing.

Always try to carry the cost of water and septic to the buyers of lots. This will devalue the parcels a bit, but trust me when I tell you that a modern sand filter system at 10k gallons/day will cost over $1M. This is of course, if you can even build a septic system on the land.

Be ready for it to take years for approvals. Sometimes the DEQ will want you to dig test pits and wait a year as soil tests are done. Google "Gateway Village", and read about it. That has been over a decade in the making. You will need money for lawyers and engineers throughout that entire time. So always have a spare $50k ready for that.

Don't do a major sub, do a minor of 5 or less lots. Far less regulations, and infrastructure costs are greatly reduced.

Know your target demographic. Big Sky people are not the type who like traveling on gravel roads or living on 1 acre lots. You may want to pave and divide no smaller than 5 acres. That may not work out in most cases.

Good luck!