Five Tips for Real Estate Development

According to a November 2012 editorial in Banker + Tradesman on housing development, "Now is the time for the private development community to step up and start building."

The Boston Foundation's 2012 Housing Report Card for the Greater Boston area documents the need to double or triple yearly housing production through 2020 (to 12,000 - 19,000 new units per year), with a likely shift in demand toward multi-unit condominiums and rental housing but with a significant number of single-family homes, too.  The Foundation predicts that the market will be shaped by young households "increasingly saddled with student debt" as well as the aging of the baby boom generation looking to downsize.  Both factors point to smaller housing units.

Governor Patrick's housing plan calls for 10,000 new units per year through 2020 with an emphasis on "transit-oriented development" (higher-density housing near village and urban centers or near trains, subways, or other public transportation).

The Boston Foundation concludes that, "More than ever, the Commonwealth should see housing development and housing affordability as both a moral obligation to its residents and an economic necessity for a prosperous future."  (my emphasis)

 

Now for some practical information:  Many real estate development projects were permitted but not built due to the economic recession.  For owners, engineers and consultants looking to start construction under those permits, or for buyers purchasing those projects or lenders advancing funds to develop them, it is important to confirm that construction is truly ready to begin.  Here are some considerations:

1.         The existing approvals need to be reviewed carefully to ensure that they have not expired and do not include pre-conditions that could delay the work.  Bear in mind that the 2012 Permit Extension Act provided an extension for many local and state permits that were in existence between August 15, 2008, and August 15, 2012.  (I circulated a memo regarding the Permit Extension Act in August 2012.  Please contact me if you would like a copy of it.)

2.         A strategy should be developed to address permits that may have expired or are close to expiring.  Note that the expiration date in some permits refers to completing work whereas in others it refers to starting work, which can be a big difference.  A strategy to deal with possible permit expiration could involve filing a request for an extension or renewal (with adequate documented reasons), appearing before the permit granting board, commencing some aspects of the work or otherwise exercising rights under the permit, or taking some other measures.

3.         Many permits contain requirements that must be met before work can begin.  Although some requirements may be inexpensive and easy to satisfy, some pre-construction conditions may be time consuming or costly.  For instance, if an additional study or plan was required, that could take significant time or money.  Similarly, time and money would be involved if a condition required the creation of an entity to perform future operation and maintenance (O+M) activities or required the grant of a conservation restriction or some other real estate conveyance.  Thus, the pre-conditions need to be evaluated carefully.

4.         The bylaws, ordinances and regulations should be reviewed to determine if there have been new amendments since the project was approved.  Although "grandfather" protection may exist under certain land use laws, that protection may not be absolute and may not extend to all laws and regulations.

5.         If the land or building is controlled through an option agreement or purchase and sale agreement with provisions for permitting or other due diligence, the agreement should be examined to ensure that all conditions to complete the transaction have been or will be satisfied.  For instance, if the agreement contains provisions for notice, extension, or achievement of certain milestones, it is important to confirm that those steps are taken.

 

After the tough real estate conditions over the past several years, it will be interesting to see if we meet the annual housing goals leading up to 2020.  With our "moral obligations" and "economic prosperity" on the line, let's hope that the market rate and affordable housing that our area needs is actually constructed.

Please contact me if you or a colleague has any questions regarding real estate development or construction issues.