To develop real estate, one of the first things you need to have is a site.
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Finding a good site, however, is only the beginning. There are a number of things that need to be done in order to acquire the site and develop it. For commercial properties this includes doing a basic pro forma and site plan, negotiating basic terms, getting a signed option agreement, completing due diligence, preparing for financial closing, and closing the deal.
Pro Forma and Site Plan
The first big step once you find the land is to do a basic pro forma and site plan. This includes having an architect lay out a general scheme for what you will put on the property. This allows you to go get preliminary pricing information from a contractor and to build a pro forma. Don't forget to include plenty of time for the acquisition process and construction process in your pro forma.
Negotiate Terms around Land Residual
Once you have done your basic homework to ensure that the site works and the project has a chance of being financially viable, you want to negotiate some terms for purchasing the ground. The price you pay is often called the "land residual" because once you determine the return you need and all other parts of the pro forma, you can back into the residual that you are able to pay. This represents the highest price you would agree to pay.
Sign Option Agreement
The next step, after negotiating basic terms, is to get a signed option agreement. The option agreement should give you some more time (anywhere from 30 days to 6 months depending on the market) to complete formal due diligence. The key here, however, is that you have the exclusive right to buy the land for a price that you have already agreed to with the owner.
This is very valuable in the event that you are able to negotiate favorable land use terms with the local municipality. For instance, land that is zoned agricultural is typically not worth very much due to its limited use. However, if you can option a piece of ground and then get the inside track on re-zoning the ground for commercial use, you will have increased the value of the land dramatically. As the holder of the option, you will capture that value.
Complete Due Diligence
While in the option period, remember to complete all of your due diligence including title checks, planning and zoning coordination, further design and pricing work, market research, and more. The more time you have to do this background work, the better.
Prepare for Closing
Unless you plan to pay for the land in cash, you will want to use the option period to coordinate your loan for the project. Make sure you get terms from several lenders before you lock in on the project. Lenders have different requirements, and you will want to get the best terms. You may use this opportunity to negotiate loans for both the land purchase as well as construction.
Close the Deal
Once you have all of these ducks in a row, go ahead and close the deal. Then you can move into the next phase of your project: getting construction approvals and building your project.