Land Development

Introduction

LAND DEVELOPMENT, A PROCESS THAT IS BOTH AN ART AND A science, comprises a large number of interrelated parts. A clear understanding of how each part affects the other is one of the keys to successful project development. Equally important is the timely execution of each part related to the whole project. Awareness of the effects of the project’s scope and timing produces an efficient process from start to finish. Developers also need to understand and incorporate the holistic nature of developing land into their plans and procedures. Developers should pay particular attention to how each separate part of the land development process affects the other parts to facilitate the desired outcome.

The land development process is continually evolving. Developers must be prepared to respond to fluctuating market trends, decreased land availability, more stringent regulations, and economic trends. The successful developer stays abreast of these social, economic, legal, and design factors. Because of the length of time involved in taking a new development from concept to sales, developers must anticipate changes in some of these factors. Predicting the lifespan of a current trend and forecasting future trends is not an exact science, but your success can be greatly improved through diligent research.

Figure I.1 presents the broad work categories and corresponding tasks that make up the land development process. The development tasks may change in response to external conditions even though the broad categories tend to remain static.

Although this list is presented in a linear order, the land development process is not a linear one. The developer and the project team may have to retrace their steps at many points along the way. As new information becomes available, you must reconsider past decisions. This synthesis of information, in which you discard unworkable ideas and seek new conclusions, is the essence of the process. In a successful process, the developer makes the appropriate modifications of original impressions and decisions at various stages along the way.

Because you can approach the process from several different standpoints, where it begins influences the entire order. The approach advocated by this book begins by determining the best marketable idea for a given local area, followed by the search for the best site to accommodate that idea. If you have already acquired a parcel of land, the search begins with determining the highest use for the site. Another approach might begin with a search for a suitable site to support a previously determined marketable idea.

Once the site and the idea are placed together for serious consideration, the process of researching, analyzing, and synthesizing data to produce the final master plan remains virtually the same for each approach.

The Concept

The land development process commonly begins with a good idea for the creation of a new community, one that will serve its residents’ needs and aesthetically coexist within the preexisting local urban or suburban area. The new development must prove economically viable for both the developer and the residents. To formulate a successful idea, the developer should begin with an understanding of the local marketplace and what the targeted buyer needs and wants in a new community. You gain this understanding by gathering and investigating all pertinent data.

FIGURE I.1

Basic Steps in the Land Development Process

You must employ three major categories of investigation to create a master plan for a new community on a selected site (Fig. I.2). Once you have formulated the concept, the first step is to research the existing conditions. The next step entails analyzing possible project constraints and opportunities based on the research. You then need to synthesize the results of your research and analysis into a coherent, functional plan that supports the original idea for the new community.

The investigation process involves market research, site selection and analysis, project design, site engineering, project cost, and financial feasibility (Fig. I.3). Each component plays a unique role.

Market research involves determining what type of buyers to target; understanding their buying power, lifestyle characteristics, and product demands; matching housing types and master plan concepts with those characteristics; and formulating the appropriate advertising and sales strategies.

Site selection and analysis involve developing a list of desirable site characteristics; discovering all the physical, regulatory, geotechnical, and social factors of a particular site; and analyzing the impact of those factors on the project’s viability.

Project design matches marketing research with the site’s innate characteristics to produce a master plan with housing types that reflect buyer preferences.

Site engineering encompasses the physical manipulation of the topography and installation of the infrastructure necessary to support the master plan concept.

Project costs include the soft costs (regulatory fees, marketing, investigation) and hard costs (labor and materials) of each work item. You must correctly forecast these costs and develop a schedule to complete each task so that you can produce an accurate cash flow for the project.

The project’s financial feasibility is determined by its profitability, which is the result of actual sales minus project costs.

FIGURE I.2

Investigation Process

FIGURE I.3

Major Components of the Investigation Process

The Project Team

Land development requires input from a variety of disciplines. Assembling the right mix of professionals and consultants to provide the specialized knowledge required for the various aspects of creating a successful project will place you on the path to project viability. The primary members of the project team include a marketing professional, a financial professional, a project planner, and a design team (Figure I.4).

The developer steers the project team. His or her primary responsibilities are to assemble and direct the team, determine the factors that each team member must investigate and analyze, reduce costs, and define the overall project goals to prevent duplication of work, gathering of unnecessary information, and increased costs. The developer should establish effective methods of communication and determine how the team will share information. Regular meetings should be scheduled to help the team stay focused.

FIGURE I.4

Project Team

The marketing professional’s primary responsibilities are to identify the appropriate buyer, discern buyer preferences, and execute the advertising campaign and manage the eventual project sales. The financial planner determines the project’s feasibility under various sales rate projections, factoring in all project costs. Marketing and financial analysis may be handled in-house or contracted out to a firm.

The project planner, or director of the project, might be an urban planner, architect, or landscape architect. Although one of these professionals might assume the leadership role, each would require input from the other disciplines. The project planner oversees the development of the conceptual master plan including marketing, financial feasibility, and design.

The civil engineer, another member of the design team, might be responsible for evaluating geotechnical conditions and determining infrastructure requirements. The most successful master plans result when the architect, landscape architect, and civil engineer work together to achieve the developer’s vision for the new community.

At times, the developer may need to call in auxiliary project consultants to help create the master plan. These consultants might include hydrologists, geologists, soil scientists, environmental experts, construction managers, and attorneys among others. The size of the project, as well as the location of the site, will help determine the kinds of consultants needed. The project planner should determine the need for additional consultants, advise the developer about their respective roles, and coordinate the distribution of all information among the design team.

Although the developer must bear the expense of an expert project team up front, it can actually help keep down costs associated with proving project success and complying with a more complex regulatory climate in the long run. You cannot avoid the new project constraints created by the increased regulation of social and environmental impacts. However, a creative project team can help the developer find ways to turn project constraints into opportunities for new designs with increased market appeal.

Increasing Land Development Constraints

Land development remains a vital part of the U.S. economy as it enables local regions to provide housing and jobs for growing populations. However, an increasing number of legal and permitting issues have had a negative impact on land availablity. Today developers must confront increased site work and construction costs; shrinking municipal budgets for providing community services, security, schools, and other infrastructure; and the public’s growing concern about increasing sprawl and decreasing environmental quality. These trends make it more difficult for developers to acquire and attain zoning approval for new home construction, which in turn has a negative impact on housing affordability. These factors contribute to the overall dwindling supply of land available and approved for residential development and have produced an affordable housing crisis in many parts of the country.

To compound these problems, evidence suggests that heightened public scrutiny manifests in an organized attempt to influence the way land is developed. In general, the best land has already been developed, and much of the remaining land contains restrictive qualities that caused developers to pass on it in the first place. When the residential development boom first began, developers naturally chose sites that were optimally located and easily developed, instead of sites that had engineering problems or no available utilities. Therefore, developers today face problems that were relatively uncommon in the 1940s through the late 1970s.

Yet, a great deal of the remaining land exists in prime locations and, if done correctly, is worth developing. These factors point to the increased necessity of discovering, analyzing, and synthesizing the critical marketing, financial, geophysical, regulatory, and social information to determine a project’s success.

Today’s buyers are more sophisticated about the issues involved in land development. They are seeking high-quality communities, not just housing. Therefore, developers must strive to preserve the natural features of the land where applicable and tailor their community design to promote and support a certain lifestyle. This type of quality-based approach will appeal to buyers and help to ensure a successful project.

The Effect of Social Changes on New Development Types

The next decade will be an exciting time for land development. Emerging niche markets offer a range of opportunities for developers. The 50+ demographic will continue to be a prime target, but that group’s needs and desires differ from the same age-group 20 years ago. This group is working longer, living longer, more active, and eager to begin the new phase of their lives in which children and work will not come first. They are interested in self-improvement, physical fitness, and social and recreational activities. Chapter 1 will discuss the full range of emerging target groups along with their customer profiles.

Because of changing demographics, economic factors, and an increased dependence on new technologies, developers need to stay flexible. Flexibility can be especially helpful in determining site plan design, target market, and housing product. As the process of determining a market and choosing a site moves forward, you need to keep alternative uses and choices in reserve should sudden unforeseen changes occur. Unless you have a high level of confidence in your target market’s viability, avoid selecting a site that is suitable for only one purpose.

New trends in social interactions, job types, and commuting preferences also serve to create a steady supply of new markets. Security issues, increasing fuel prices, and the cost of materials have also emerged as factors to consider. Town-centered communities that are pedestrian friendly, have higher densities, are transit-oriented, and have mixtures of commercial and residential uses are making inroads into the previously dominant conventional suburban development form. One thing is certain: In the next decade, considerations for land development will be changing at a more rapid pace than ever before.

However, good timing, sharp instincts, an expert team, and innovative planning will play important roles in the process of creating a new community. The chance of success is greatly improved when the developer understands the full range of the land development process and the impact of each of the various components involved.

Chapter One

Identifying Your Market

DEMOGRAPHICALLY, THE UNITED STATES IS IN A STATE of unprecedented change. The average home buyer in terms of age, ethnicity, employment, and marital and family status no longer exists. The 50+ age-group is now the largest population demographic and will remain so for years to come. Gen-Xers are also impacting the market. Although they desire to become home owners, many in this demographic are choosing to delay marriage and having children, thereby requiring a totally different type of housing product than this same group needed 20 years ago.

Because of environmental, health, and safety concerns, a significant number of buyers are seeking shorter commutes to work or easy access to mass transit. For the first time in 30 years, many buyers are leaving the suburbs and moving back to urban centers, causing suburban developers to strive to attract buyers to town center–defined communities featuring service and retail amenities. Additionally, affordable housing is at an all-time low. Residential developers must acknowledge and adapt to these changes to remain profitable.

You can minimize project risks and increase your opportunities for financing through marketing analysis. This analysis helps you justify the need for your proposed residential development in a chosen area and allows you to evaluate buyer characteristics, location, and site attributes to produce a strategy for targeting specific buyers. If you want to understand the nature of acquisition capital and development loans, increased competition, government regulations, and changing population characteristics, then marketing analysis is essential. Knowing the market allows you to offer buyers the type of community and home that would most appeal to them.

To keep a competitive position, market research and analysis are vital. Investors such as syndicates, asset managers, and real estate investment trusts (REITs) depend on market studies to select properties for portfolio investment. Government agencies use market studies when evaluating areas for revitalization and policy implementation that affects development.

Market studies are an important part of any business plan. Study findings can be useful in estimating future supply and demand, profiling customers, and assessing competition to discover undetected markets. These studies also allow you to tailor your product to the unique needs of a particular buyer. The pinnacle of success in residential development occurs when you can provide your target market with a development and housing type that not only meets but exceeds their expectations. The idea is that once the unexpected is presented, these new concepts become attributes the buyer cannot do without.

Both lenders and investors use the market study as a tool to justify a large capital allocation to a specific project. Initial project feasibility can only be proven by thoroughly documenting the market, the land’s development capacity, the cost of compliance, and projected sales and cash flows.

Types of Market Studies

Market studies come in many forms, from large and comprehensive to small and select. Small projects sometimes require answers to only a few questions if you are experienced and working in a familiar area. Conversely, the questions are numerous and complicated when large projects are developed in phases over a long period and offered to several target markets.

Some broad-based goals of market studies are to help the developer accomplish the following:

Understand housing supply, demand, and absorption rate in a given geographical area. Absorption rate is that at which residential units are sold or leased within a given period. The term can apply to the housing supply and demand of a given geographical area or to a particular project’s rate of sales. It can also refer to rental property.

Determine both a target market and the type of development and home to provide. The target market is a distinct segment of all potential buyers who share the same demographic characteristics, such as age, race, gender, marital status, number of children, income, education, and profession.

Accurately profile the buyer’s lifestyle characteristics.

Acquire specialized knowledge of the market, for example, regional preferences or special needs of assisted living residential housing and any other requirements demanded by the lifestyle characteristics of targeted buyers.

Provide information that helps sell the project to lenders, investors, and other builders.

Demonstrate that a housing demand exists in the area to planning authorities.

Most market studies can be grouped into four basic types: general, site specific, highest and best use, and customer profile studies (Fig. 1.1).

General

You can conduct general studies in a large geographical area such as a state, county, or city, to determine a location for a known type of development. These studies are usually performed by large development companies that have both experience and success in building specific types of development in other locations. Regional studies to determine a location for a transit-oriented development (TOD) or development locations within a transportation corridor (corridor study) pinpoint ideal places for large, mixed-use communities with access to mass transit. General studies include buyer demographics, area economic conditions, and future conditions based on such elements as new major employers, academic or government institutions, or recreation hubs. General studies also include questions about the nature of the marketplace, the competition, the possibility of new target markets, and economic influences on a buyer’s ability to purchase a home.

FIGURE 1.1

Types of Market Studies

Site Specific

If you already own a parcel of land or hold a purchase option, you can conduct a site-specific study. This study evaluates site characteristics in terms of location, capacity for number of units, and overall density per acre. It is used to discover and analyze prominent site features such as mountains, hills, or waterfronts, as well as regulatory considerations. Once collected and analyzed, this information will help you determine the best development for the site and which type of buyer to target.

Highest and Best Use

If you already own land or a developed parcel in need of revamping, you need a highest and best-use study. This study helps you determine the most profitable use of the site permissible under site constraints and regulations. Similar to the site-specific study, this study will help you determine what to develop and your target market. However, this study also includes a financial feasibility analysis.

Customer Profile

Customer profiling determines the type and number of different socioeconomic groups in a given area. It further defines the demographic and lifestyle characteristics of specific groups of buyers with similar socioeconomic backgrounds. This study also works for a single target market group. For example, customer profiling can uncover the driving forces behind current trends. With cluster analysis, different target market groups can be grouped according to their response to certain trends. Thus, cluster analysis might show that the 55- to 65-year-old demographic has similar computer needs as the 25- to 35-year-old demographic, even though these groups are very different in age and most lifestyle characteristics. Cluster analysis is a statistical approach to placing different groups together into large market segments to better leverage development type and home design needs. Knowledge of these profile similarities can help you create innovative design solutions. This, in turn, might reveal a potential market window, a group whose needs are not being met with existing product offerings. Your goal is to uncover the needs of this group and provide the most marketable product possible, thereby increasing project success.

What Kind of Study Do You Need?

No matter what type of study you conduct, you should begin by clearly defining your goals. Work with your marketing staff to identify the appropriate type of study for your needs, what information you want to get out of the study, how the information will be gathered, the cost of each approach, and what you can expect in the final study.

Each type of market study must answer a broad range of questions. Marketing studies are usually conducted at the beginning of a project—before site selection and purchase. However, if you already own your site and wish to find the best use for it, a comprehensive market study (a combination of the full range of issues covered by the other three types of market studies) might also be in order. Alternatively, if you are familiar with an area and are contemplating a smaller development, you might forgo a comprehensive effort and limit the study to the investigation of one or more specific questions.

The comprehensive study can help you answer four basic questions:

What will be the future size of the total market in your local area, and what proportion can your project capture?

What are the demographic and psychographic (lifestyle) characteristics of your target market within a certain household income range?

What lifestyle preferences, such as types of developments, location, amenities, and services does your target group demand? This question should account for the difference between demand and desire for a product. If demands are not met, the buyer will reject the product. If the project goes beyond meeting demands to also meet some of the desires, this enhances the product in the buyer’s eyes. This question also addresses any specialized information pertinent to the target market.

Given the nature of the target market, the local area, competition, and economic factors affecting the target market’s buying power, what is your project’s anticipated absorption rate within a given period? What are your cash flow requirements and anticipated rate of return?

A comprehensive study might also include a variety of other relevant information, such as the desirability of the site location or an in-depth analysis of the competition’s offerings. The study is useful for answering broad questions, such as how many households in a certain area are within a particular income range or what percentage of households in a particular income range are married with children. It will help answer more specific questions, such as how many households in the $200,000 income range are professional, double-income families with no children. Comprehensive studies can also answer targeted questions, such as how many in the range play golf as their primary leisure activity.

You may need to reexamine the market to adapt to sudden changes. For example, suppose you purchased a site with the intention of developing single-family homes for first-time buyers. When the site was purchased, interest rates were 5.5%. But by the time the project is ready to be offered to the public, interest rates have risen 3 points and the original target market can no longer afford the product. In this case, you may need to do a quick study to find a new target market for the original product and assess what changes, if any, may be required.

Housing Supply and Demand

One of the first decisions you must make for your new venture is the number of housing units to supply to the market in a given period. First, define the macromarket area from which the project will draw potential buyers. The macro-market area is a chosen geographical region from which the data that support the demand for housing will be gathered. That area could be everything within the city limits or a portion of a highly populated city. For smaller cities and towns, the macromarket area might be the entire county.

Once you’ve determined the macromarket area, study the housing supply and demand situation within a specific time frame to forecast demand for a future period. Housing supply refers to all existing housing stock (homes) on the market, including homes currently under construction. To determine demand, look at how many houses sold in the previous year.

Consequently, if supply and demand are quantified yearly, you can determine the absorption rate (supply divided by demand). Study the absorption rate over a period of at least five years to ascertain the health of the housing market, which includes both sales and vacancy rates. Given the cost of construction financing, evaluating the absorption rate helps you project both the number of houses you might reasonably offer and your anticipated sales rate.

The thing to keep in mind when determining housing supply and demand is the number of houses in a given price range that can be sold the year the project comes online, when the units are ready for sale. Once you know that number, you can determine how many of those sales your project can capture. Begin your study by gathering the following information: housing mix, population projections, household size and configuration, destroyed or razed housing, age of householder and income, and current unsold inventory.

Housing Mix

You can find the percentage of all housing provided during the year within the categories of single-family, multifamily, and mobile homes from data found in the local building permit department. These percentages are known as the housing mix. If these data are gathered for at least five years, you can predict the percentage of each category you might offer at sales time. Your prediction will be based on whether the percentages of the past will continue. Whether they continue, increase, or decrease depends on the amount of unsold units in each category, the general health of the economy, and any potentially significant change in the local economy, such as zoning changes or the gain or loss of a major employer.

Projecting Demand

Future demand is based on population growth, increase or decrease in household size due to social change (household formation), number of destroyed or razed housing units, and the undersupply or oversupply of existing housing. To project future demand, you must first forecast the population increase in the macromarket area. You can obtain this data from several public sources, including chambers of commerce, the local government’s economic development office, and