In the world of real estate development, many deals may seem good on paper, but upon closer look end up being a potential waste of time and money.
Over the years, we’ve analyzed thousands of deals. Whether you’re a real estate investor or developer, you’ll have to learn to say “no” to the majority of deals that come your way.
Based on this experience, we’ve developed a step by step system that I’ll detail below to ensure your development investment is worthwhile:
1. Ensure your proposal complies with zoning code:
When you’re building new construction, the first and perhaps most important step is to ensure that the proposal you envision to be profitable adheres to the regulations of your municipalities zoning code (sometimes referred to as zoning ordinance).
Most zoning codes are available online via a quick google search. If your municipality does not provide their zoning code online, contact them directly to find out how to access it.
The most important things to pay attention to, as a developer, are what zone are you in (found from your city’s zoning map), the use regulations, and the dimensional regulations.
2. Check existing buildings for historical status:
Many of the strongest performing real estate markets in the United States are already densely populated. As a result, new development often involves demolishing or expanding existing lower-density structures to satisfy the increased housing demand.
Existing structures may be deemed historical by federal, state, or local regulations, preventing demolition and in some case preventing expansion as well.
Registered historical properties can be an interesting and lucrative development opportunity when you consider historical tax credits, but beginners should be careful with this type of development. We will explore this in another article.
3. Soil and Geotechnical Testing:
Regardless of whether or not there is already an existing structure on the lot you intend to demolish, you must not overlook the need for soil testing prior to beginning the design of your development.
Existing structures may have been built in a prior era with less oversight and irresponsible development. A geotechnical engineer is a key member of your team, and his reports will inform the structural design of your building.
4. Environmental Testing and History:
This aspect is crucial for several reasons. Environmental contamination is common in many populated areas throughout the United States (and worldwide as well). This can again be traced back to a more irresponsible prior time with fewer regulations. Your lot may have known contamination and be restricted by a Land Use Restriction Agreement with the government.
These agreements may restrict residential development or new development of any kind. Even if your lot has no known contamination, it is both morally imperative to test for the sake of any future occupants, as well as a requirement by many lenders. A 21E form shows the status of environmental contaminants after testing by a professional, and is required by all lenders.
5. Conservation Protection Regulations:
If your property is near a designated conservation area, such as wetlands, you will need to consult with an environmental consultant to determine if your development requires additional approvals above and beyond normal projects.
Whether this is relevant to your property is determined by the distance to the conservation areas (which can vary widely, and is best discussed on a project-to-project basis with your environmental consultant).
6. Flood Plains and other Flood and Natural Disaster Regulations:
In certain areas flooding is a potential threat that poses additional regulations and the need for flood insurance. This is also true of other natural disasters, though flooding is a concern shared by many dense populations in the US.
FEMA, the Federal Emergency Management Agency, produced flood maps that determine the risk for different areas across the country. They separate the risk profile in the likelihood of a flood occurring in years; for example, a 100 year flood plain will, on average, have a flooding event occur every 100 years.
The more likely flooding is in your area, the more stringent the regulations imposed on your to mitigate damage to your building. We’ve built waterfront new construction multi-family properties where the first story is restricted from occupancy and must be dedicated to flood mitigation. The more you prepared for these situations, the more likely you are to win.
7. Local Community Regulations and Restrictions:
Even if your property complies with the dimensional and use regulations of your municipality’s zoning code, there may be additional restrictions that require community meetings with local abutters where they can voice their opinion in a public setting.
These regulations may or may not exist, given the political landscape of the area you are developing in, and if they do exist, the amount of power abutting neighbors have over your proposed development can also vary. Some areas, like Boston and San Francisco, grant the community great power to halt development they do not approve of.
This is not a death sentence to your project, as the right architect can come up with sensible buildings that respect and complement historical trends in the neighborhood and achieve higher density while blending in with the existing streetscape through clever design.
8. Parking and Open Space Regulations:
The dimensional and use regulations are the first place a developer should consult when analyzing new construction deals, but an often overlooked, but key portion is the parking regulations section of the zoning code.
I’ve seen many deals where, in theory, you could follow the dimensional regulations of code and have a profitable project, but the amount of parking spaces required is too many to fit on the lot.
This is because many lots in medium-density areas, which are often a prime target for new developers, have open space requirements in the zoning code, preventing you from using your entire yard as parking. In areas with stringent parking regulations, we typically design our urban infill new construction deals as having a dedicated first floor garage with no living space.
If it pencils out as a good project and we later find we can fit some outdoor parking, which is just icing on the cake. Remember to budget the construction cost for the garage, if you include one, which is often forgotten by beginner developers.
9. Title Issues:
Title to the property is the legal chain of ownership that passes down to you from all the previous owners when you purchase a new property. This is a legal document, and though it seems objectively a little silly, we’ve seen deals encounter problems where something as simple as a typo in the name of the LLC that previously owned the property spooked title insurance companies from insuring the deal.
The reason for this is that there is the risk someone, at some point in ownership, sold a property they did not have the legal authority to. People could then come out of the woodwork years later and claim ownership in a property, even if it was a prior owner to the people who sold you the property. As a developer, you intend to improve the property and greatly increase its value, and with increased value, a title defect becomes more and more of an issue.
10. Federal Aviation Administration (FAA) Regulations:
Your lot might be in a zone that allows for a building height of 50 feet, but if you are in a critical flight path designated by the FAA, you may be required to design below that number.
There are airports nearby most major cities and the surrounding suburbs, so make sure you are not restricted to a lower height than your zoning code may lead you to believe.