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Due Diligence & Design

September 22, 2018

 

 

 

[This post is part 2 of an in-house seminar I recently gave to a client on the development process. Part 1, First Principles of Development, can be found here]

 

Due diligence & design is the most important phase of the overarching development process. This is where the real research, analysis, and groundwork are performed. Below are the primary steps with descriptions, information, and definitions. 

 

 

Market, demographics, and economic studies

 

These are commonly referred to as “feasibility” studies and imply exactly that: does the prospective development location have the market viability, preferred demographic mix, and economic strength to support the establishment and sustainability of the intended business?

 

These reports are typically researched and produced by specialist consultants who scour the available public and private data resources to determine such indicators as median household income, mean property value, size and net worth of nearby businesses and employers, economic and geographic growth statistics, secondary and post-secondary educational institutions, and potential competing businesses.

 

The importance of having these reports in hand and the information they provide before proceeding into the process cannot be overemphasized.

 

 

Land acquisition

 

One of the biggest mistakes developers make is choosing a piece of property because they like the area, or because it seems like a good deal, or it appears to be undervalued, rather than selecting a property based on its viability, which in large part is determined by the feasibility studies as referenced above.

 

The reasons listed in the first sentence of this section are based on feelings or perceptions, and not on qualifiable facts and statistical information. It might be a “good deal” or potentially undervalued because the last business that was situated in that location went under, and the owner can’t get anyone with good information interested in the property.

 

The best method is to determine a general area of town that you would prefer developing in (perhaps a 4-6 square mile area) and then have your feasibility studies address this area. If the results are encouraging, a specific location can be narrowed down to 2-3 separate parcels, which gives you negotiation leverage with competing sellers or leaseholders.

 

 

 

 

Environmental assessments

 

These include Phase 1 and Phase 2 studies. Phase 1 typically identifies existing or potential environmental contamination based on current or past uses in regard to the subsurface conditions and existing above ground improvements. Suspect site features include open pits, wells, and the presence of hazardous contaminants such as combustible fuels, oil, garbage, and refuse piles, in addition to USTs (underground storage tanks) and existing buildings or structures that may have been used for manufacturing or warehouse purposes.

 

Sites previously used for agriculture or industrial purposes are particular subjects of scrutiny being that agriculture implies storage and dispersal of insecticides, pesticides, and diesel fuels, and industrial uses indicate potential storage, usage, and residual presence of hazardous chemicals, solvents, minerals, and heavy metals.

 

Phase 2 studies are not typically commissioned unless they are particularly warranted by indicators discovered in the Phase 1 study. If a phase 1 indicates a high probability of site contamination, a phase 2 is commissioned and will include sampling and chemical testing of groundwater, soil, air, refuse, and building materials still present on the site.

 

Any “brownfield site” (a site previously developed that is not currently in use) has the potential for contamination. Most “greenfield sites” (a site not known to have recent development and is overgrown with native plants) are without contamination unless there has been illegal dumping of materials, or the site was used far in the past for some type of industry that employed hazardous materials.

 

 

Engineering Survey

 

An engineering survey typically is conducted by a licensed Professional Land Surveyor and consists of a plotted to-scale CAD drawing that includes the metes and bounds (or legal perimeter of the property), all existing improvements and significant land formations or other structures, any public or private easements including railway, utility, right-of-way, or access; and in the case of a topographical survey, contour lines in 5 or 10 foot elevation increments indicating ridges, hills, ditches, swales, and depressions.

 

Metes and bounds are expressed as a vector bearing from a starting benchmark in the form of “N 42d 35’ 22” W” which is translated “North, 42 degrees, 35 minutes, 22 seconds, West”. This only conveys the direction; the actual distance is expressed as a decimal, e.g. 120.50, which is 120’ 6”.  This continues from each bearing point or “pin” to the next, finally completing and closing the boundary at the starting benchmark.

 

The engineering survey is a must-have in terms of anything to do with development, construction, or even just the acquisition of a piece of land. It is the first-and-last word in terms of legal instruments that very specifically defines the property boundary. Almost all disputes between adjacent property owners are due to disagreements over the real boundary between the properties.

 

When conducting a survey, a Professional Land Surveyor will try to locate the existing pins or monuments placed by either the original property surveyors, or those that have been re-established after the original markers were either lost or removed.

 

 

 

 

Flood Zone

 

Flood zone determination requires specialized research considering that the pertinent information is voluminous. Click here for the FEMA flood zone designations which are the first step to understanding this issue.

 

 

Metropolitan Planning Commission

 

Any development of an appreciable size will be required to submit for “conditional use approval” to the municipal MPC prior to beginning design. This consists of rendering a letter of intent outlining the scope and parameters of the project, and typically includes a preliminary civil engineering site plan and architectural elevations of all intended structures. These are submitted in advance to the director of city planning for questions and comments, prior to presenting to the MPC at the meeting for a vote.

 

If the project consists of multiple buildings with occupancies (as opposed to storage sheds or vehicle garages) the MPC will require submittal of a Planned Unit Development (PUD) application which will explain and address the intended uses, sizes, occupancies, and occupancy classifications of each building. Once the PUD is approved, you are ready to move into design.

 

 

LEED & Sustainability

 

Almost all federal public projects now require a LEED certification of silver, gold, or better. Many state, city, and private projects also have this mandate being that it produces energy savings, encourages the design of more efficient buildings, utilizes recycled materials and low-carbon manufacturing processes, and decreases the amount of construction waste.

 

The decision to pursue responsible sustainability in any development project should be a foregone conclusion (see First Principles of Development, item Three). However the pursuit of LEED certification requires a thoughtful analysis of attainable credits prior to the beginning of design, and then an eye towards each of these credits throughout design of the overall site and buildings, paying special attention to the materials and systems as selected and specified.

 

LEED certification requires a level of design and construction management scrutiny that is a step-up from the traditional process. But the benefits continue throughout the life cycle of the project, and certification itself can be an excellent marketing tool and a feather in a project’s cap.

 

 

 

 

Complete sealed & signed construction documents

 

Depending on the type and scope of project you are intending, you will expect to employ the following professionals to produce the requisite drawings within their respective disciplines:

 

Land Surveyor

Civil engineer

Landscape Architect (if required)

Architect

Interior Designer (if required)

Structural Engineer

Mechanical, Electrical, and Plumbing (MEP) Engineer

Fire Protection System Engineer

 

 

Plan Approval via Office of State Fire Marshal

 

The state of Louisiana has an excellent system of fire code and ADA review, which is actually much better than some other states where I have designed projects. It’s very simple: when your construction documents are complete, you sign on to the OSFM (Office of State Fire Marshal) website; go through the menu selections for code classification, occupancy, location, type of project, square feet, estimated construction cost, and local code enforcement authority; upload your drawings via pdf format, pay a small fee based on project size and type, and you’re done.

 

The architect reviewer assigned to the project will either approve your project and issue a “letter of release” to you, the owner, and the local code authority; or they will send you a list of the issues that require clarification or redesign, for which you will make the changes, submit those changes, and then approval is then issued. It’s all online and typically takes 2-3 weeks depending on the complexity of the project.

 

I should state that this process is somewhat easy if you’re an architect with a solid and thorough understanding of the International Building Code (IBC), the National Fire Protection Association code (NFPA), and the Americans with Disabilities Act (ADA). If you’re not, and you haven’t designed your project with foreknowledge of both of these codes and the ADA requirements in mind, you’re going to have quite a bit of trouble, and the OSFM will most likely recommend that you seek out the services of an architect to take care of the task.

 

Louisiana is currently on the 2010 ADAAG (Americans with Disabilities Act Accessibility Guidelines) and the 2015 version of both the IBC and NFPA. It is typical for a state to be on a code version that is a few years behind the actual year, in that code versions change every 2-3 years and require review and adoption by state building and fire code officials prior to acceptance.

 

It should be noted that the ADA is not specifically code, but federal law, and is promulgated and overseen by the US Department of Justice. The ADA was enacted in 1990 as part of the 1964 Civil Rights Act and prohibits discrimination of persons with disabilities by the existence of architectural barriers to public accommodations made available to able-bodied persons. Because of this, there is strictly no “grandfathering” of buildings or site conditions that present architectural barriers to the disabled.

 

Existing businesses, schools, churches, and public facilities are all required to make what is considered “reasonable and achievable” architectural modifications to accommodate the ADA for the sake of the accessibility of the disabled.

 

Once the letter of release is forwarded to the local code authority, permit may then be applied for and construction commenced.

 

 

 

 

Permitting

 

Local construction permits are granted based on a review of the project by city reviewers and building inspectors. If the project was properly designed adhering to the relevant codes (IBC, NFPA, ADA, and municipal requirements such as building setbacks, landscaping requirements, and relevant architectural controls) this should be a formality. If there are problems, it should be something trivial as in a request for clarification on a detail or specification.

 

 

Infrastructure improvements

 

In the process of arranging for utilities (electricity, water, sewer, and gas) for the project, it is standard to contact the individual utility companies and outline the scope of the project (sometimes with drawings) in order to secure “will-serve letters”, which are written commitments from the providers that the existing utilities which currently supply the site will suffice for the new project. Public utilities track existing infrastructure via GIS (Geographic Information Systems) surveys.

 

If a utility will not issue a will-serve letter, this is most often because the existing supply is deemed inadequate and will require augmentation in order to meet demand. This most usually occurs with power supply and sewer. In most cases the utility companies will pay for the new equipment necessary for supplying the project, but often this is only up to the easement or to the switchgear. This means that the owner will have to provide the service from the taps on the main lines or the service from the switchgear to the transformers.

 

 

 

 

Financing

 

There are two types of financing in any development project: construction financing and permanent financing. Permanent financing is secured after the project is complete and the owner has taken occupancy. Construction financing is obtained for the interim between site mobilization and final completion, and pays for the labor and materials necessary to build the project.

 

Construction financing usually has a higher interest rate and less favorable terms due to the risk of not having a completed set of assets to borrow against. This is why time is of the essence during construction. The more time spent under construction financing, the more interest has to be paid out month after month on a rather expensive and unsecured loan. Staying on schedule and operating in a safe, efficient manner is the best defense against unforeseen delays.

 

 

Rezoning

 

From personal experience I can say without hesitation that it pays to find out if the property you’re considering for the development can be rezoned to the fit the use before you purchase. It is not uncommon for the MPC (metropolitan planning commission) to reject out of hand a rezoning request for a property from residential to industrial, being that adjacent homeowners, HOAs, and subdivision developers will vocalize their opposition at the scheduled MPC vote, stating their case as to why allowing this development in this area would have a negative impact and prove detrimental.

 

The rule of thumb is that it is easier to move up in the zoning hierarchy and difficult to move down. “Down” is typically heavy industrial or manufacturing. “Up” is top-tier residential and office space. Typical commercial office, retail, hospitals, and other occupant types usually fall somewhere in the middle. Most municipalities are eager to welcome development of gated communities and well-heeled office complexes, being that a boon in tax revenue is almost guaranteed.

 

Conversely, any type of industrial manufacturing concern presents myriad potential problems: noise, air pollution, possible ground water contamination, waste disposal, extended hours of operation, light pollution at night, and heavy truck traffic.

 

 

 

 

Advertising and Notification of Intent to Rezone

 

If the MPC is amenable to the rezoning, the owner/developer may be required to advertise the rezoning hearing in a local paper, and post a "request to rezone" on a sign at the property with the hearing time and date. This is to give the community a chance to respond and air out grievances in advance of the MPC vote.

 

However, just because a few members of the community take issue with the development does not mean the rezoning will be rejected. In most cases the MPC will carefully weigh the facts and only vote down a rezoning request in an instance where they believe that the rezoning will have a real and profound deleterious effect on the surrounding community or the area at large: e.g. establishing a landfill right next to a suburban community.

 

It is wise and good business practice for the owner/developer to conduct a brainstorming session in advance of the meeting, in order to identify the most probable objections to the project that will most likely be vocalized, in order to formulate positive and lucid answers and solutions that will assuage the concerns.

 

Now you are ready to publicly advertise the project for bids, award the project, and allow the contractor to mobilize the site. 

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