You need third-party reports

Yup. We're going to get a little nerdy here.

Alright, Bright Builders!

Over the last two weeks we’ve covered Letters of Intent (LOIs) and Purchase Agreements (PAs).

We talked a lot about why LOIs come before PAs and the intricacies of both. If we emphasized anything, it was that the ordering of activities in real estate development is where people most often lose their shirts (and their sanity).

At this point in our development we’re going to imagine that we’ve struck a deal with the owner of Franky’s, and therefore we have a purchase agreement.

Have we spent much money yet?

Not really, with the exception of a couple hours of our lawyer’s time on the PA. What we have spent is time (and time IS money, so I guess we did spend a little money, but you get my point).

In about one minute here, we’re going to get our checkbook out and start commissioning third-party reports.

But before we do that, we’ll do something so simple.

And far too many new developers just…

Don’t…

Do.

It.

We’re going to pick up the phone.

And we’re going to call the city planning department.

Why? Because the city does not like surprises and neither does our bank account.

It’s as simple as this. We pick up the phone and let them know that we’re working on a specific project, and we want to get their quick take on whether it would garner their support. Do we have drawings from architects? Nope. Do we have third-party reports? We sure don’t. What we do have is a purchase agreement, and we’ve studied the zoning for the site. We’re essentially looking for confirmation that there haven’t been changes to zoning or anything else that would affect our plans. Later, after we have schematic design plans, we will actually meet with the city in person, have a planner assigned, and really talk through things.

So, assuming this call goes well, which I'm sure it will because we studied the zoning and know our market well, the first thing we’re going to do is engage a surveyor company, and they are going to create a Land Survey.

This process usually takes three to five weeks. Our surveyors will put together a legal survey showing all of the easements and property boundaries - basically, a really specific map of the property illustrating all of the pieces we need to know. We’re going to review this, but we’re also going to have our attorney review this, too.

Why?

Because attorneys will always catch something.

I did a deal once in Nashville and the survey looked great. Or so I thought. Then, my attorney realized there was a railroad easement running through the corner of one of the existing buildings. That was a problem :-)

The other document we need to get is a Title Commitment.

A title is a legal description of the land and the chain of title documenting who has owned the property. The seller will usually pay for this (you negotiated that in your PA, right?) and again, we want our attorney to review this as well. You’ll also get UCC and tax lien searches done against Seller by name and the property. If there are any issues as to who holds the title on the land, or anything that would make buying this property difficult/impossible from a title perspective, our attorney will write a Title Objection letter documenting those issues. In my experience, issues with titles are rare, but they can certainly put a kink in your plans.

The third document we need produced is called a Phase One Environmental Site Assessment or a Phase One ESA.

This assessment reviews the current and historical uses of our site and any potential environmental issues that could prevent building on the site. For example, was there a dry cleaner there in 1967 spilling solvents in the soil? A gas station? A summer camp where six campers mysteriously disappeared at midnight in June of 1996? Kidding. That’s not a thing.

You always hope your Phase One comes back clean. In the event that it does not, we then have to do what's called a “Phase Two” which is the actual testing of the areas of concern. A Phase Two is far more expensive than a Phase One since Phase Two often uncovers a site that requires environmental remediation.

The fourth document we need is a Geotechnical Report and we’re going to wait to commission this report until after we’ve received the Phase One.

The Geotechnical Report documents borings drilled into the soil and the testing of soil conditions as well as how much load the soil can take. For example, if we propose building a four-story building, we need to know if the soil is strong enough to support that weight.

How much does all of this cost?

Assuming our 50-unit proposed project on Uncle Franky’s, the survey is going to be 4-5k.

The Title Commitment is typically paid for by the seller, BUT we’ll pay for our attorney's time to review, so we should anticipate $500.

Phase One reports are usually around $2,500.

Geotechnical reports are expensive, falling between 8-12k depending on the number of borings needed.

And then, finally, if our Phase One comes back with something questionable and we have to do a Phase Two… we all go out for a beer and weep quietly in a dark corner.

Kidding. No weeping. But, a Phase Two will cost 15-20k. Sometimes more, sometimes less, but that’s a safe range to assume. Ouch.

One of the biggest mistakes people make is to rush this process and move into the schematic design phase with an architect, where they begin laying out the building, the footprint, the number of units, the parking etc. This enthusiasm is costly, however since sometimes you have to adapt your plans in a significant way as a result of third-party reports. Perhaps the soil load won’t hold our proposed four-story building or the parking won’t work because of the Geotechnical Report. Or, we find out that our site used to be home to a dry cleaner, and we can’t do underground parking unless we do some major remediation! And that’s complicated, expensive, and not something to mess with on your first project. (Unless, maybe in your previous position you were an environmental engineer or something :)

We always want our third-party reports back first before we move into schematic design. We need to understand how those reports affect our plans. Candidly, any architect worth their salt should want to see your third-party reports before they partner with you.

How long does it take to generate these reports?

A few months. Many times, firms will call you before they issue the report and give you some insights into their preliminary findings so you’re not operating in the dark. If you need a Phase Two, you’ll find out relatively quickly.

What do you know now? About 99% more than many, many first-time developers!

But I know you have questions.

Let’s chat in the comments below!