When you’re considering purchasing property for a commercial construction project, there are several things you need to think through and plan before actually committing to the purchase.
This process is commonly known as a “Due Diligence” process and it’s crucial to your project being a success.
Understand How Much of the Property’s Square Footage is Usable
This is the amount of land that remains after you have determined the following: the amount of land the city, county, or state might require for street widening, utilities or expansion; the amount of land that might be unusable due to grade issues (such as the land being too steep) or water issues; land that is needed for any easements or right of ways through the property that you can’t be used to build upon; the configuration of the land, which has a large impact on how much building square footage can be obtained, among other considerations.
Size of Property and Planning Designations
If the proper is not the size you need in order to begin building, it’s important to understanding what it will take and what you will need to have to get the property rezoned or the changes in the planning designation. This is made much easier by consulting with a commercial builder who does this type of work in your area on a regular basis and has been through the process already. The consequences of not completely understanding this process can be very costly in terms of dollars and time wasted.
Issues with Titles
Title issues can be one of the largest difficulties for property owners. It’s important to obtain a title commitment or a title binder from a title insurance company. This will spell out any exceptions to the title that might limit the possibilities in which the property can be used and would need to be cleared before a loan could be obtained. A wide variety of issues can come to light in these documents and at times the property could be determined to be unsuitable.
The costs for off-site development can become a huge item. These are costs that will that the landowner will be required before they can even begin to build on their own property, due to the fact that until they are paid, they will be unable to get a building permit or a certificate of occupancy. On many occasions, the local municipality will have declared that the street running adjacent to a piece of property needs to be widened or a new intersection be installed and the landowner will be required to pay for a portion of those improvements. This can become very costly, but these costs are fairly easy to determine by speaking with the local municipality about the property itself. Also, there could be utilities that are available but are some distances from the building site. The cost of extending these utilities are typically paid by the property owner unless an arrangement with the utility provider is made. Have these utilities extended can become very expensive, so understanding what utilities are available at the site is extremely important to understand.
Soil testing will need to be done to understand the type of structural foundation that will be needed given the soils capacity to bear the building. The impact on the budget can be as high as thirteen dollars per square foot of the building and worse, they will have no effect on the valuation of the building itself.
This another area that is important to understand. In the past this has little bearing on the purchases of property, but is becoming more and more prevalent int today’s market. If required, it’s important to know whether any type of particular testing needs to be done to comply with any particular funding opportunities and that information needs to be communicated to the consultant hired for environmental testing.
The Impact on Property Valuation
This is a highly subjective topic. When you borrow money for the proposed building project, it will most likely be based on an appraised value that has been determined by an appraiser. The ways in which the building project could be valued can vary widely. A discussion with commercial builders who are familiar with the process can help as can a discussion with a real estate broker or an appraiser. These can save you a considerable amount of equity dollars when in negation over the terms of your loan.
Due diligence is a huge responsibility, but is important to make sure your project is completed smoothly. If you’re considering a commercial project, contact us at our Joplin, MO offices. We offer pre-construction services and can help get your project off to a great start.