How to Develop Land: Step by Step Guide

First step is to determine demand for your product and highest and best use of a piece of land. You do this by analyzing the market, talking to realtors, property management companies, appraisers, builders and developers in the area to find out of there is a demand for the product you have in mind. You can also check with the city or county planning and development department to find out what types of projects are in the pipeline for approval.

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 to validate your assumptions. 

Back of the napkin valuation. 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 land cost, site 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 equity investors and the debt service after stabilization and then some. Banks like to see a 1.25 DSCR 

To determine max price you can pay for the land take finished value of the project including land and subtract your desired profit of at least 30% then subtract all costs to build including soft costs to get entitlements. That leaves max allowable offer price for land.

If the project looks feasible from a financial standpoint the next step would be to find a suitable property and get it under contract contingent upon getting all approvals and permits for what you want to build. 

Once you have control of the property you begin the due diligence and entitlement process. You do not want to close on the land until you have all your approvals to build what you want. 

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 and what's required before you get too far down the road or purchase a property.


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