Michael Sisk
06/01/2004
Indian burial grounds, endangered species and angry foxhunters are but a few of the innumerable obstacles that can hinder landowners seeking to develop their properties. Time and again, even the most experienced developers flirt with circumstances that could scuttle a project, though more often than not, patience, experience and compromise win out and success is achieved. “A deal lives and dies a thousand times before it’s done,” says Don Shapiro, an officer in the Beitler Co., a Chicago-based development, management and transaction company.
| “Politics is a filter that helps you understand what you can and cannot do.” |
To illustrate this potential, David Hidalgo, president of Hidalgo & Co., a real estate firm in West Hartford, Conn., recounts his experience working with a wealthy widow who recently revitalized parts of downtown West Hartford through the development of some underutilized property. The woman, whose late husband had run a large car dealership just off Main Street, wished to sell the land where the dealership once stood. Although it was zoned for something fairly unimaginative, like a supermarket or box warehouse (and she received offers from those wishing to pursue those types of projects), in the end, she struck a creative deal to make her parcel the centerpiece of a major downtown redevelopment that will eventually include residential housing, a medical office building, theaters, retail space and a new town square and town green.
Initially the woman
considered selling her property outright, though the final agreement she
negotiated gave her an option for an equity position in the project equivalent
to one-third of the purchase price. She also took an option to acquire one of
the condominiums being built. “She realized the entire character of downtown
would improve, and she wanted to be a part of that. She wanted to participate in
the project,” explains Hidalgo, whose development team spearheaded the
development.
Divest or Develop?TOP VIEW
Properly developed real estate holdings can become powerful legacies
for our families and communities. The actual development process, though, is
often an ulcer-inducing obstacle course of cutthroat politics, stifling
environmental regulations and sour business relationships. To avoid such
pitfalls, we should carefully design our projects and, more importantly, partner
with an experienced, trustworthy developer who can bring those projects to
fruition.
Such salubrious outcomes are not the result of mere
chance. Rather, they are the rewards of a sometimes lengthy process, one that
begins with us asking the two important questions: What can I do to make the
most of my property? How involved do I want to be in its development? The first
question goes to the heart of vision and intent, the second to execution. The
answers (and ensuing further questions) tend to intertwine.
The simplest
solution for a landowner is to sell the property outright to a developer without
contingencies and be done with it. This is a clean, quick and relatively
risk-free option and may well be the best one for those not interested in taking
on a potentially long, expensive project, or entangling themselves with business
partners. “There are time and patience and aggravation issues,” warns Steve
DiFrancesco, of the Philadelphia real estate firm Hunter, Reed & Co. “The
average time [a development project] takes is 12 to 36 months. It is not
something that happens quickly. You need emotional and financial staying power,
since there is an opportunity cost associated with having capital tied
up.”
FIVE QUESTIONS WE SHOULD ASK POTENTIAL DEVELOPMENT PARTNERS
2. What financial alternatives can the developer offer that might
lessen the capital investment required of each party? |
A straight sale bars a landowner from having any influence over a project’s direction. If we decide that we do, in fact, want to play some ongoing role, we nearly always have to partner with an experienced real estate advisor or an actual developer—often the same firm or person—whose expertise can save immeasurable delays, costs and frustrations.
Once a landowner and developer define a project and form a legal partnership, the developer must coordinate with three important constituencies—local political leaders, neighbors and environmentalists—to keep
the project on track, both before and during construction. Aggravating any one
of these sensitive groups can cause significant delays, and might even doom the
project completely.
Hidalgo notes that in West Hartford, his company spent
considerable time reviewing the town’s master plan, then crafting a project idea
that seemed consistent with the collective vision of local political leaders. As
a gesture toward civic pride and nostalgia, developers named the project Blue
Back Square, the title of favorite-son Noah Webster’s first book, published
before his famous dictionary. “Politics is a filter that helps you understand
what you can and cannot do,” Hidalgo says. “While a particular parcel might be
zoned for a particular use, that use may not be politically accessible.”
Community Quagmire
DiFrancesco tells of one development disaster that
came from a landowner ignoring such considerations. In the bucolic countryside a
short distance from greater Philadelphia, an investor purchased a rather large
tract of land in a wealthy enclave where fox hunting is a popular pastime and
the ability to cross properties during the hunts is an unspoken cornerstone of
the social contract. This investor wanted to subdivide and develop the property,
a goal that, according to DiFrancesco, did not immediately doom the project,
because it would have actually preserved considerable amounts of open space.
Unfortunately, the plan’s execution turned into nothing short of a debacle.
Instead of hiring local architects and lawyers with established political
connections and the knowledge of what it takes to get a deal done, the landowner
opted for a hardball approach. “He brought in a lot of outside people, a
powerful lawyer from Philadelphia and other powerful experts and never solicited
the township’s opinion or advice. They were like a bull in a china shop,”
DiFrancesco recalls.
Furthermore, the landowner antagonized his neighbors by
closing his lands to their horse riding and foxhunts. Though most community
property use laws are designed to respect the rights of owners, in some
instances, the citizenry may view private property as a quasi-public resource,
one in which they legitimately have a stake. As a result, concessions (or at
least open lines of communication) to a local community can be critical to
winning approvals for development. These concessions often include promising not
to seek maximum density and preserving significant open space; occasionally,
they even extend to providing rights of way to fox hunters.
Though, in this
case, the landowner did ultimately reverse his decision to close the property to
fox hunting, the damage was done, and local politicians and residents responded
in kind: The approval process, which should have taken no more than a year,
required six years and cost $300,000.
The landowner became so frustrated
with this expensive, seemingly endless process, that after finally winning
approval to rezone, he sold the property without ever actually recording his
plan with the county. As a postscript, DiFrancesco reports that the new owner of
the property (one of his clients), by working closely with city officials, has
won two five-year extensions to the previous owner’s rezoning approval—an
unprecedented accommodation by the town.
Even with local politicians and the
community behind a deal—and often with their vociferous support—the long arm of
environmental regulation can prove challenging. The most common issue is
wetlands management. If an environmental engineer designates more of a property
than expected as wetlands or watershed, the developer will have to return to
square one. The discovery of a threatened or endangered species (such as a
spotted owl) can also be an obstacle, placing the property on the radar of
environmental activists. “A well-funded environmental group can really hamstring
a deal,” says DiFrancesco, “because there are so many agencies
involved.”
Partnering with a developer who has proven expertise in topography
and environmental regulation is obviously essential to success. But the quirks
that can crop up during a development project go well beyond those of
topography. A historical structure on the property can influence the kind of
work done, as well as the tax breaks available. Occasionally, something
completely unexpected—the discovery of Native American burial grounds, for
instance—comes to the fore and has to be accommodated. The Beitler Group’s
Shapiro has encountered burial grounds twice in projects he has developed. “Both
times, the area had to be left undisturbed, one time with a fence, and once with
a plaque denoting its significance.”
DiFrancesco observes, “No matter how
much due diligence is done ahead of time, some things always come up in the
process. Development is a dynamic process.”
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