In today’s bottomed out real estate market, it takes more sophistication and intelligent planning than ever before to make a development successful. With tight margins, large inventories of unsold or foreclosed homes, and low demand, simply bringing homes to market quickly does not guarantee success – it takes diligence and innovation to simultaneously maximize residual land value and create a development where families will want to live. Good land planning is a crucial element of making projects work, so fixing broken land plans is a hot topic these days.

The success of any such effort to redraw and update a proposed development demands a deep understanding of its physical and geological constraints in addition to extensive knowledge of improvement costs and an understanding of the housing marketplace as a whole.  Developers Research (DR) possesses a unique combination of extensive project experience coupled with high-tech software capabilities that enables us to modify the existing entitlements to be more contemporary with the marketplace.

Many existing land plans are based upon marketing reports that were prepared up to 10 years ago under drastically different land conditions that leave these plans obsolete and unfeasible under today’s depressed market conditions. Often, these land plans were created at a time when the developer’s priority was completing the project as quickly as possible and insufficient consideration was given to the grading requirements of the development site.

It is common to read grading estimates and assume uniform, generic grading costs per cubic yard when calculating time and costs needed to prepare a site for development. But these assumptions do not take into consideration the geologic or field conditions of a site, many of which may not be readily apparent.

Import or export of dirt is pricy, and failing to balance the earthwork onsite can drive costs up quickly. Even within balanced sites, hauling of material is often misunderstood, and developers underestimate the difficulty involved in moving earth uphill or over difficult terrain. Rocky sites or areas with difficult material add time and money to the equation, and constrained working areas slow down the grading process.

With the near halting of development activity nationwide, we have seen that state and local governments are much more willing to work with developers to make projects feasible. This presents an excellent opportunity to repair land designs, particularly those that still have current entitlements. In times like these, every dollar counts, and mistakes that may have been overlooked and may not have been significant five years ago will have a much larger impact.

In the last building boom, many inexperienced planners and engineers were hired and often mapped out large, complex projects with a final goal of increasing lot count, not land residual value, which is the value of a raw piece of land calculated by taking the market value of a development and subtracting all improvement and construction costs.  Higher lot counts may have equated higher cash flow or higher residual land value 5 years ago, but that is not always true today.

DR’s primary focus is to minimize grading costs while maximizing the profitability and effectiveness of a land plan.  We achieve this by adhering as close to possible with existing topo grades, avoiding high-cost areas (heavy-ripping, blasting etc.) and at the same time orienting lots to take full advantage of any view premiums available.  DR utilizes a specialized software called Agtek Earthwork 3D to calculate grading quantities and review the effectiveness and profitability of a land plan.  This software, primarily used by grading contractors to calculate takeoffs, presents us with several unique abilities from the planning and cost analysis perspective.

Agtek allows us to model the design and remedial surfaces in 3D and provides us with a much better understanding of the existing conditions and the final design.  We can input data directly from the geotechnical investigations such as test pits, borings, air track logs, seismic lines, and other forms of geotechnical data.  This includes hard rock layers, blasting and heavy ripping, alluvium/colluvium removals, landslides, and groundwater levels.  Previously overlooked difficult and expensive areas of grading suddenly stick out when modeled in 3D.  By identifying which areas are most expensive to grade, we can either eliminate these areas or determine a more efficient use of the topography.  In addition to eliminating costly grading areas, we can also ensure that development phases balance on their own and don’t require import/export between phases.  This allows the developer to postpone the costs of later phases and maintain a more uniform cash flow through the life of the development.

The following are examples of  flawed land plans where Developers Research was able to reduce costs and achieve a much greater land residual value for our client:

Click for larger image

In the first example DR eliminated the large, flat super pads that required over 150 feet deep cuts in rock.  In place, DR utilized terraced grading to reduce the deep cuts to a maximum of 70 feet and increased the number of view lots.   DR reduced the total grading volume by 40% and the volume of hard rock by 60%.  The terraced grading also helped to reduce the amount of manufactured slopes for the site.

Click for larger image

In the second example DR reduced the grading volume by 30% and the grading costs by 40% due to the fact that most of the material eliminated was hard rock.  Also, DR increased lots with views from approximately 700 units to 1,900 units and DR reconfigured the interior streets to ensure that lots no longer fronted on streets with steep 10% grades.

At DR, we have reviewed many projects where individual lots have negative residual values.  In one such example, eight lots were designed on a ridge with grading costs exceeding $120,000 per lot.  Combined with other development costs and fees, total cost for each lot was in excess of $220,000 with land residual value per lot at just under $160,000 (even including a significant view premium).  On a 2D map, these ridge-top lots may look like a good idea, but the developer increased profit by simply not building those lots.

These are just a few examples of the tremendous potential there is to re-plan existing projects.  Spending a little bit of money now to re-plan a project can lead to substantial increases in land residual value, giving developers and lenders an exit strategy and letting them recover significant portions of investments which they may otherwise have lost. Re-drawing large land plans and re-considering the layout of an entire development can be expensive. But that is a miniscule price to pay compared to the cost of letting poor land plans go unnoticed.

As you know, the economics for residential real estate have significantly changed during the past several years.  As you (builders and developers) search for new projects, bear in mind that certain cost attributes have changed during the last decade.  We’d like to highlight a few relationships that we believe have made many properties appear negative in the existing environment.

The first of these relationships relates to Impact Fees.  We consider impact fees to include payments to governmental agencies for sewer and water connections, parks, transportation, flood control, environmental mitigations and school fees, among others.

In 2000, Impact Fees were not considered a significant source of revenues for government jurisdictions.  In most jurisdictions, impact fees represented between 3% and 5% of the sales price of the residential unit.  In many jurisdictions in 2009, impact fees represented between 15% and 25% of the sales price of a residential unit.

In one local jurisdiction, the total impact fees required for a 1,000 square feet “SF” unit are approximately $40,000, equal to $40 per buildable SF.   In the same jurisdiction, building a 3,000 square feet unit required payment of impact fees of approximately $57,000 or $19 per SF.  Due to the weakness in the current residential market, some developers are proposing modifications to land plans to include smaller units without realizing that a large percentage of their gross revenues are paid to local jurisdictions.

The second relationship that changed during the past decade is that there been significant modifications to various building standards that are now codified in the Uniform Building Code.  Among building code modifications, changes that have occurred in fire safety, seismic and energy efficiency have had substantial impacts on direct construction costs.  Although all types of residential units are affected by the changes in building code modifications, the most significant impacts are on multifamily products.

The difference for construction costs for detached product and attached product widened from as little as $5.00 per square foot in 2000 to more than $25.00 per square foot in 2009.  In addition to the changes dictated by the Uniform Building Code, there has been a reluctance of subcontractors to bid on attached products because of increased builder and subcontractor exposure to homeowner and homeowner association liability.

Finally, the cost of general liability and course of construction insurance has widened for homebuilders.  All insurance premiums are based upon a multitude of factors.  However, the typical costs for insurance during the construction period for single-family detached housing can be reasonably estimated at about 1% of sales price whereas the costs for attached housing is reasonably estimated at 4% of sales price.  For houses selling at $200 per SF, this increased insurance cost is about $6.00 per SF.

When you combine the impact of increased impact fees, direct construction costs and insurance premiums, the cost differential between detached and attached has increased by as much as $45 per SF during the past 10 years.  If houses are selling for $200 per SF, these increases represent as much as 25% of the sales price of the unit.

Although these increases may seem insurmountable for a specific project, the opportunities exist for builders and developers to modify existing entitlements in order to avoid the burden of the new multifamily financial realities.

If you are interested in learning more about how to benefit from the new cost relationships, please contact Developers Research.  We are available to assist you in identifying how you can more efficiently underwrite a property in today’s market.