S.E.C. Real Estate Observer

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The Business Plan

WHAT IS A BUSINESS PLAN FOR LAND DEVELOPMENT?

It is the business plan that makes the difference in dirt development. Unlike projecting rents and expenses on improved properties, land development must take into consideration many additional factors, especially the costs to get to the income. The end result is the same, income in and expenses out. But while you have a fixed set of numbers on the acquisition of improved property, in land development, you have to start from scratch. And it is here that the costs can add up and mistakes are made. How can you get those costs down? Once you have identified a piece of land that will serve your purpose, the business plan must be put on paper. If you cannot detail the plan for development, you are not suited to develop the tract.

WHO CAN HELP ME PUT THESE NUMBERS TOGETHER?

I start with our civil engineer. Usually civil engineers are conservative in their nature (architects can be dreamers) and are well suited to assist in design and pricing of the development of the land. Put together a team including a civil engineer and possibly a contractor. Ask them to assist you in the design. I never ask our engineer to work for free but many contractors will help you at no cost in an initial cost estimate in hopes of getting the job. Just remember one thing: you get what you pay for. If you ask a contractor to get you costs for the project, keep in mind that he is used to working to be the low bidder and will most likely not be as complete as the engineer in identifying his line items. I like to get an estimate from the engineer and then give his line item breakdown (without his numbers) to the contractor to confirm the engineer’s numbers. Also always ask the contractor if he sees anything you (the engineer) might have missed. Is there any way to “value engineer” the proposal to get the costs down.

CAN I GET SOME HELP WITH THE COSTS OF THE UTILITIES?

YES! In Texas, we have sales taxes on most retail purchases. This is the single largest source of local revenue for cities and other political subdivisions, including school districts. One of the best places for information is the local economic development (EDC) office in the cities. But don’t stop there. The EDC function is to help create jobs. While the EDC offices usually like big industrial projects, most will look at the impact of retail also. For instance, a Kroger or Albertsons will not only create jobs but it will also create sales tax for the municipal entity. I heard yesterday that a good Best Buy will create sales of $1,000 per square foot. Let’s see, 45,000 s/f times $1,000 = $45 million. Just apply your local sales tax to the gross sales and come up with the number you want to use with the EDC when asking for help. Give an estimate of the number of jobs that will be created also. Do you think this might give you some leverage in negotiating for dollars for water or sewer lines? And, don’t forget to remind the EDC officials that those dollars are being spent in the next town if that applies. The old “keep your shopping dollars in your community” works well.

WHAT IF THE INFRASTRUCTURE SERVES MORE THAN MY TRACT?

This one can be tricky but I try to turn it to my advantage. If the utilities, roadways, etc serve the tract next door, this can be a good thing if you are careful. While we don’t want to tell the guy at the other hard corner who we have lined up to anchor our development, if your improvements will help him also, see if you can get participation in the costs. If your use is retail, and the infrastructure will help the residential land, go for it for certain. I usually tell the residential developers that I want them to take the largest share of the burden as they are developing a much larger tract and they will need the utilities first. In our area, we are very quick to cooperate in this manner.

IS THE SITE BALANCED?

This has nothing to do with a mental state. When grading a site, you will need to know how much excess soil you have or how much fill you will need from outside the project. We were developing a site in Mansfield, Texas a few years ago and needed a lot of fill. Luckily for us, we were also building a highway service road at that location. The service road had excess. The construction contractor was all too happy to bring the soil to us and give it to us for free. If we had to import the fill it would have cost us over $2.00 per square foot to our project. Our pads have sold from $7.00 s/f to $12.00 s/f. It is easy to see how significant that was to our bottom line. Contact the engineering department of your city and ask them if there is a project being planned that might help you in gaining import if you need it or that might need soil themselves if you have excess. Contact the local dirt contractors. Many times they will come onto your site and assist you in taking the excess out of your site if they have a place to sell it. Look for large estate type homes that might want a stock tank if you need to import. Get your contractor the job of building the stock tank and get your soil for free.

I KNOW THIS IS A GREAT PIECE OF DIRT. WHAT WILL FIT ON THE SITE?

Residential developers are notorious for leaving hard corners or strips along highways that are much too large for the highest and best use for the property. If you are unsure of what would fit on the site, get a survey or plat and go to the civil engineer or architect and have them lay it out for you. A trick few think about, and one that will cost you no money at all, is to get the survey and then identify some existing improved properties that you think might work within those demographics. Then go to the municipal planning office and ask to see the plans for that shopping center on the corner of Main and Main. Compare the configuration and sizes of the existing center to the tract you have identified. For instance, in our area we need 225′ to 300′ for strip retail or small office. If your tract is 600′ deep, you might need a different plan. Just remember one thing, retailers want to be seen. Don’t expect to have a successful retail project with a lot of hidden space. This goes for the local professional also. It is a big deal to the little physician or insurance company in our area to have excellent visibility. The signage on their building is advertising – plain and simple.

I hope this has helped with the first stage of the planning.

Next issue: SHOW ME THE MONEY – HOW WILL I FUND THE DEVELOPMENT?