Question about "tying up" a property for development
Hey guys,

I've identified a vacant commercial property that seems ripe for development.  It is located on a main road in a nice town outside of Boston.  The neighborhood has a ton of young families moving in, and there are other new mixed-use developments nearby that seem to be doing well.  It's a single-story standalone vacant manufacturing building.  About 3500 square feet.

I've connected with the owner (nice older guy) who seems open to selling.  There is no way I can afford the price he wants by myself, but I'm confident I could raise the capital and/or find a developer to  partner up with ASSUMING we could get a development approved on the site.  I'm thinking apartments or mixed-use with retail on the first floor and apartments above.

I'd like to make an offer on the property for his asking price (to tie up the property), but also buy myself a few months to explore the zoning situation and development opportunity.  If a zoning approval or variance seems feasible/likely then I'd approach some investors to raise the necessary funds and move forward with the purchase.  If the site isn't a viable development opportunity, I'd back out of the deal (and lose a deposit, presumably).

What is the best approach here?  Should I straight up explain to him what I am trying to do and see if he'd go for it?  I have no problem putting a deposit down ($5k?  $10k?) that I would forfeit if things don't move forward.  Would it make sense for me to make an offer on the property for his asking price knowing that I can't afford it myself?  Would a seller ever go for that?

Any thoughts or advice would be appreciated.
[{"id": "gym8okf", "text": "Buy an Option to purchase the property.", "replies": [{"id": "gynawnf", "text": "Options, like most things in CRE can be challenging. A client of mine owns a 10,000 sf commercial space on a main road. The one story building is leased by a few mom and pop retailers. The building has been in the same hands for decades and hasn't changed much since the 1950's. It is ripe for development. My client sold his neighbor an option to purchase. The option cost $200,000 and lasted for five years. Purchase price was to be $6mil. The option lapsed, my client got to keep the $200k and has a contract to sell to a developer for $6.2mil, minus 3% commission.   In five years, the buyer could not come up with the money and is out $200k plus whatever he spent on due diligence (not much I suspect).", "replies": [], "depth": 2}], "depth": 1}, {"id": "gym8wl8", "text": "You can ask for a due diligence period of 60-90 days. You\u2019d have to put a small deposit (earnest money) down, which is refundable (soft earnest ) upto the end of the due diligence period. After that, it becomes non-refundable (hard earnest). You can generally push for the 60-90 days if you tell them you\u2019ll have a 7 day closing after the due dil. \n\nI\u2019ve also dm\u2019d you", "replies": [{"id": "gyn3go2", "text": "Thank you.  Wow, so closing is typically that soon after the due diligence period (7 days)?  So obviously in addition to your due diligence work you are working hard to secure financing for an immediate closing if things move forward...", "replies": [{"id": "gynj97g", "text": "You should not be doing this\u2026. Read a few books and do a ton of research. \n\nA reasonable person in a normal market wouldn\u2019t even close on a house with 7 day DD if it was even possible.", "replies": [{"id": "gynk35q", "text": "He was asking about the closing period NOT the DD period.\n\nHowever I agree with your assessment regarding OP\u2019s skill set in relation to development.\n\nIt\u2019s not an easy game OP - even if you have the best tenants, the best GC, the best engineering,  etc you might still fail based on factors completely outside your control.", "replies": [{"id": "gynkoip", "text": "You are correct My bad: but either way they are not prepared for this deal. And I\u2019m not prepared to be able to read a comment.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "gynu6lm", "text": "Just for future readers, 7 day closing is not typical for land transactions at all. Typically you will want to close with entitlements which can easily be 12-18 months after DD. The exception would be an extremely competitive bid process. DD on land is almost always 60-90 days given the complexity.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gym9ar6", "text": "Have you looked up sales comps? That will give you an idea of if this is a good deal or not.\n\nDo you have any experience in building? If not, then this can be very risky. Definitely do not put down non-refundable earnest money if you aren't positive that you'll buy the place.  \n\n\nYou can talk to a city planner about what type of property you could build. You'll want to make sure you test for contamination on site. You'll want to look at comparable sales for completed properties so you know what the end value of the property will be, and you'll want to discuss construction costs with a developer/contractor so you get an idea of what this will cost to build. There's a lot of work involved in building a new project and it can be a difficult sell to get investors on board if you haven't done it before.", "replies": [], "depth": 1}, {"id": "gyml0cp", "text": "I would just try to get it under contract without giving much information about yourself. Nobody lately asks for proof of funds, so he likely wont know you havent raised the capital. You will have to put up earnest money which is typically about 1-2% of the purchase price. But that is refundable if you terminate the contract within your due diligence deadlines.\n\nI would ask for a much longer timeline though. Its going to take you some time to find an architect (youll likely have to pay a fee for a feasibility study) then at least 8-10 weeks to get a concept reviewed by the city. Then you will gather you initial capital to close on the land. 6 months to 1 year is totally normal for land deals that will have large development projects and 4-6 months is normal for smaller deals.\n\nJust a heads up, personally I would find your capital partners before making offers on deals. If you dont have any experience building, it could be difficult to raise money for a development deal because you just dont know how to analyze a project.", "replies": [], "depth": 1}, {"id": "gymtd6k", "text": "Ask for entitlement time. Should be 9-12 mos (or idk, that\u2019s what it\u2019s be in LA). You\u2019re going to have to pay above market, but you get a year to buy it with other peoples money.", "replies": [{"id": "gyn56hl", "text": "True but depending on if the seller will allow it.", "replies": [{"id": "gyn6wro", "text": "Well... that\u2019s every sale lol! But I think it\u2019s a fairly standard \u2018ask\u2019", "replies": [{"id": "gyn92ah", "text": "100% I\u2019m dealing with a seller at the moment who doesn\u2019t understand that", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gymugcp", "text": "Developer here.\n\nI don't think you realize what the cost of actual due diligence for a development deal is and how difficult it is to convince investors to come into the deal if you've never built before.\n\nIn CA, a phase 1 report, soils report, survey, and prelim architecture (basic DD) will cost you an easy $30k in the first 60 days of due diligence.  Then you need a projected closing date and will likely need to raise 50% in debt and 50% in equity to purchase the land.\n\nAfter you close on the land you still need to hire all the engineering consultants, develop construction drawings, bid the project with a GC, and procure construction financing.\n\nFor context, I'm just now doing my own deals after 10 years in the business and still have a tough time raising equity.", "replies": [{"id": "gyn2i6e", "text": "This 100% the correct outlook", "replies": [], "depth": 2}, {"id": "gyn3454", "text": "Thanks.  So you could spend $30k on due diligence just to find out it's not feasible and then back out.  Sucks but makes perfect sense.", "replies": [{"id": "gynbfj0", "text": "Listen to the above post. I am not a developer but I do site selection for developers. There is an easier way to go about this without spending that much cash. DM me if you have questions.", "replies": [], "depth": 3}, {"id": "gyo3mn9", "text": "A good developer usually knows ahead of time if a deal is going to work and typically pays for due diligence reports to validate educated assumptions about a site.  It\u2019s not often at all that we spend money and it goes to waste.\n\nFor example, we research all the development standards like max height, use restrictions, zoning, etc ahead of time and then have the architect review our assumptions and then if we\u2019re in agreement, we have them draw exactly what we want. \n\nAnother example is environmental contamination risks.  If we\u2019re buying a site that has had residential uses on it for a hundred years then I\u2019m not as worried about it as opposed to a former gas station site. \n\nAlso, I don\u2019t mean to knock any of the folks on this thread, but the costs I mentioned are the bare minimum to assess a site (at least in CA) and they can rapidly increase. For example, a typical phase 1 report is a visual inspection and assessment of historical uses at the property to assess the potential for contamination.  You can literally get a lazy inspector that\u2019s going through the motions or you can get the neurotic guy that sees a little bit of motor oil on a patch of the lot and will recommend a phase 2 report for more intensive inspections.  My last phase 2 quote was $17k.\n\nFinally, I would be very careful of who you partner with.  This business is rife with people that will take your money to invest on a \u201cgreat\u201d development deal that\u2019s really non-viable but they use your money to pay themselves \u201cdeveloper fees\u201d ahead of any milestones being met.  \n\nIt\u2019s really an incredibly risky business to get involved in if you don\u2019t have experience.", "replies": [], "depth": 3}], "depth": 2}, {"id": "gyn406c", "text": "Don\u2019t forget legal and accounting!!", "replies": [], "depth": 2}, {"id": "gynprv1", "text": "Listen to this person. But in case you are proceeding, a few comments/adjustments I\u2019d make: \n1. I wouldn\u2019t bother with almost any of the aforementioned DD expenditures if you\u2019re going through a rezone or variance. FIRST you need to understand your odds of winning the land use case, then think about spending more money. This should be structured into your PSA as a rezone can take anywhere from 4 months to 2 years.\n2. Speaking of which, have you thought about what it might cost to win your land use case?\n3. You know the seller and are on good terms, consider approaching him with a JV deal in which he contributes the land in exchange for ownership. If you succeed, this will take care of a nice chunk of your equity raise.\n4. 50/50 debt/equity seems like a steep capital raise. Depending on your equity backing and what kind of guarantees they\u2019re signing with you, you may be able to get a higher LTV.\n5. Again, listen to u/khorasanian. Your idea of partnering with a more experienced (and better funded) developer is a good one. Not sure they\u2019ll give you more than a finder\u2019s fee. Not sure what you\u2019re bringing to the table other than an off-market deal.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gymya79", "text": "I\u2019m interested in working with you on this", "replies": [], "depth": 1}, {"id": "gyn0b9u", "text": "Is owner financing a thing for deals like this? You could possibly get more favorable terms since you know the guy personally. And maybe if he owns it outright you could entice him with a deal structured in a way that benefits both of you.", "replies": [], "depth": 1}, {"id": "gyn2tsy", "text": "Try to see if the Seller would be open to contributing his land as equity in the deal so you don\u2019t have an large initial cash outlay. Also agree with the other comments that you\u2019ll have difficulty capitalizing the project with no track record.", "replies": [{"id": "gyn9rup", "text": "Good idea, although seller may have a hard time contributing as equity based on track record. Still worth a shot. Probably depends on what his goals are and level of other activity. Never know until you try!", "replies": [], "depth": 2}], "depth": 1}, {"id": "gynl3lu", "text": "Op - I\u2019m a developer - I\u2019m working on my CCIM, I have 10 years experience in construction, own my own dirt and concrete business, prior to that I worked as a facility planning analyst for a major Indian tribe. I have 15 years of experience in real estate. My family has done commercial development for over 30 years. \n\nI\u2019m 39 with a net worth of 3.3m now HH income of 350k last year projected for 650k this year. I have a full team that allows me to do DD and pursuit for whatever my earnest money is. That\u2019s full legal, architectural, and engineering. (Not environmental) - to compare that most developers at between 30-75k per deal in pursuit I run LEAN. Even with all these advantages I\u2019m JUST now doing my own deals.\n\nI\u2019m not saying it\u2019s impossible - I\u2019m saying don\u2019t get burned and then bitch about how hot the stove is.", "replies": [], "depth": 1}, {"id": "gyo4hd7", "text": "Become very good friends with your local officials who oversee the entitlement process, and get their opinion before doing anything.", "replies": [], "depth": 1}, {"id": "gyqy7vd", "text": "The above commenters have offered some wise advice, but I have a few questions.    How large of a parcel us this 3, 500 square foot building on?  Where I live, small warehouse buildings like that are typically not on large parcels, might be 10,000 sf for that size bldg.  A parcel that size would accommodate very few apt units where I live, maybe 4.  \n\nI only have experience with suburban markets like the kind I live in.  Where I live, multi-family development is often allowed in commercial or light industrial zoning.   However, unless a small commercial or warehouse building is on a much, much larger parcel, it would not be worth more as apartment land. If you can only build a handful of units on a parcel, it's worth very little, if anything, for apt development.  It's not worth the due diligence cost, time and hassle to build essentially a quadruplex.", "replies": [{"id": "gyulv2h", "text": "Good point.  Just under 15000 sq ft", "replies": [], "depth": 2}], "depth": 1}]