Due diligence in ground-up development
When buying land for a ground-up development project, it’s beneficial to negotiate a long conditional period. The seller holds a refundable deposit and the buyer gets an option to close on the land by a certain date.
Your goal, as the buyer, is to delay buying the site until you’ve vetted the land, developed a plan, and secured approvals. By then you’ve reduced project risk and the amount of time you’ll need to carry the land.
Ideally, you’ll close on the land and construction financing at the same time. In other words, you’ve got shovels in the ground as soon as you own the site.
I’m wrapping up this process on a property and I’m trying my best to stick the landing. We tied up a new site about a year ago and began our due diligence. With a bit of luck we’ll have approvals next month with the land closing shortly after.
Thinking back over the last 12 months, I’m trying to improve and systematize the due diligence process. So let’s take a quick look at what’s at stake and how to approach due diligence on a new site for ground-up development.
That’s me in snowshoes roaming around with my clipboard, a machine operator, and a soil engineer digging holes and taking notes, Test Pit #27: Sandy till, no rock, water seepage at 12 ft.
A long conditional period is a great acquisition strategy but even due diligence can be an expensive endeavor. The more you do before closing, the more money you need to be ready to walk away from if the site doesn’t work out.
Be prepared to risk between $50,000 to $200,000.
For this example, a Quick closing is 60 days or less, Standard is 120 days, and Long is 9 or more months.
Due diligence falls into 3 categories* (1) Property (2) Plans (3) Permissions.
Quick: ≤60 days (~$50,000) You’ve done a high level review but you’re really crossing your fingers that everything else checks out.
Property — Lay of the land. How much of the site is actually developable? How can it be serviced? Review the boundary survey, know who your neighbours are and what they do, understand the topography, and dig test pits or boreholes for a look at soil, rock, and water conditions.
Plans — Napkin sketch. Draft a preliminary concept plan. Think about the specific opportunities and constraints of the site and what information you need to determine their impact on your plan.
Permissions — Read the room. Review zoning and plans and introduce yourself to staff, neighbours, and councillors. Understand the perspective of all stakeholders and how your project fits into the broader context of the area.
Standard: 120 days (~$100,000) You know the site, what you plan to build, and who you need to engage.
Property — Site expertise. Your job is to hire a team of specialists, ask them the right questions, and integrate their reporting into the broader context of the project. You'll likely need to produce environmental, archaeological, geotechnical, hydrogeological reports. The scope depends on the how comfortable you are with the site but if you’re not doing any studies, you’re not doing due diligence.
Plans — Focus your vision. Using your everything you've learned from your team, adapt the concept plan respond to constraints as efficiently as possible. Start digging into the details of rough grading, civil servicing, street network, lot layout, phasing, architecture, stormwater, and parkland.
Permissions — Make the pitch. Meet with staff (and councillors, if you can) to get feedback on your plan. You'll be surprised how often staff comments differ from the by-laws and planning documents. Use these conversations to identify the regulatory path to success, then drill down on the detailed requirements.
Long: +9 months (~$200,000) You’ve got site expertise and secured approvals.
Property — Confirmation. Any remaining site work at this stage should be minor and in support of your planning applications, like confirming elevations or dimensions to make sure your plans match reality.
Plans — Navigate the system. Refine your plans to reflect submission requirements. It's not always required, but a detailed concept or master plan helps communicate how the project will actually work to staff, council, and neighbours. It goes beyond zoning and lotting to show how many different project components interact.
Permissions — Get approved and shovel ready. The approval process can differ but it will almost always include public meetings, staff and agency comment, peer reviews, and committee/council approvals. With those rolling, think ahead to site works. Coordinate with staff to draft legal agreements and get ready to post security, register the subdivision, and tender servicing.
* A caveat here is that most of my due diligence experience has been in markets I know very well with pre-existing lender relationships. If this weren’t the case, there’d be a couple more balls in the air throughout due diligence.
Until next time,
Angus