Commercial real estate is a significant investment, so before taking the plunge, it’s important to undertake a thorough due diligence process and insure that you will be getting a positive return on your investment (ROI).
The process is the same, regardless of your business type, land use or construction plan, but the important point is to be methodical. Too often, buyers don’t do their homework and find themselves owning a piece of land that becomes difficult to develop, or the financial equation just doesn’t work.
STEP 1 – MARKET ANALYSIS
Know what you’re looking for and what geographic location makes sense for your business. To do so you need to consider the type of business you have and the intended use of the property. Is it going to be retail space, office space, warehouse or mixed-use?
Next you need to research the areas that are the most complementary to your intended land use. Putting a brew pub in an area primarily known for a senior population most likely will not give you the same return on investment as strategically placing it near a university, or an urban area with a large millennial population. More obviously, building luxury condos in a rural area will not be as lucrative as putting them in a rapidly developing city; adjacent to shops, restaurants and compatible amenities. Know your market demographic and their spending habits, and you’ll know what geographic location makes sense.
Remember, that “return on your investment” is (or should be) your most important factor in buying commercial land. By strategically placing your business or development in an area where it is most likely to thrive, you are increasing your chances at getting the best ROI.
STEP 2 – LAND USE AND ZONING
Now that you’ve checked the market analysis box, it’s time to look at the zoning map for the geographic area that makes sense for your building. Zoning maps can be found on the local assessor’s website and you can search by property address, legal description or general area. The zoning designations describe what can be constructed on any given piece of land. If you want to build your brew pub on a piece of land you’ve discovered, don’t assume that you can just because there’s another brew pub on the next block. Zoning can change on a block-by-block basis.
If the parcel of land you’ve identified isn’t zoned to allow the construction of a building for your use, sometimes you might go through the process of having the site “re-zoned” to allow for your use. This process can take a minimum of 90 days and often includes a public hearing to allow public comment. But, before undertaking the rezoning process, we recommend that you talk with the city planner responsible for your area to understand whether rezoning is likely to succeed.
STEP 3 – LAND VALUATION
After you complete your market analysis and find a piece of land you need to obtain a land valuation. For this, it is best to hire a trained professional with experience in land development and commercial real estate. The commercial property appraiser will use a comparative process of historical sales for similar types of land in the same geographical area. A licensed appraiser is best able to give you an accurate valuation of the land. The appraisal will give you the information you need to negotiate a purchase price.
STEP 4 – LAND INFORMATION MEMORANDUM (LIM)
Next you will need to obtain a Land Information Memorandum Report which is prepared by the City at your request. The LIM differs from city to city, but usually includes special features, potential hazards, zoning, water and waste services, and any notices or orders affecting the land, such as easements. These are the legal property records for the property you’ve identified.
Without the comprehensive property record, you might encounter issues that would block you from using the land in the way you intend. A title company can also help you obtain this information.
STEP 5 – FINANCING
Finally, you need to obtain financing. You might make this be your Step 1, because without the ability to finance a land purchase and construction, you don’t have a project. Whether or not a lender finances you may depend on the size of the land, location, zoning, intended use, the availability of basic services, access, and any impediments to the eventual construction.
STEP 6 – ENVIRONMENTAL
Your financial institution will also want to know that the property is free from environmental contamination. Typically, a Phase One environmental survey is required which reviews the history of the site and also includes taking earth samples in several locations. The samples will be tested for contaminants, and if there are signs of contaminants, a more indepth survey is undertaken. Typically your financial institution will choose the testing company.
STEP 7 – NEGOTIATE
If you’ve done your homework and have a strong business foundation, then you will be able to obtain financing. And, knowing your financing ability allows you to negotiate the sale in earnest.
If you discover a piece of land you’re interested in, but concerned that a buyer will snap it up, then make an offer with contingencies. It gives you time to do your homework, and if any of the factors outlined in STEPS 1-6 don’t work, you have the ability to cancel the contract. A suitable due diligence period in a contingency contract is generally 90 days.
If you’ve done your homework, and choose land based on your findings, you can avoid potential roadblocks and achieve a positive return on your investment. Ready, set, invest!