Assemblage, Design and Construction for Real Estate Developments
| Publication year | 1982 |
| Pages | 2297 |
| Citation | Vol. 11 No. 9 Pg. 2297 |
1982, September, Pg. 2297. Assemblage, Design and Construction for Real Estate Developments
This is the second of three articles in The Colorado Lawyer which discusses development of large-scale real estate projects. The first article appeared in the August 1982 issue and covered financing issues related to real estate development. This article deals with assembling the land necessary for real estate development and designing and constructing the project. The third article will deal with governmental involvement in such projects.
As discussed in the first article, the real estate developer undertakes an activity substantially the same as that undertaken by most other business enterprises in that he assembles raw materials, manipulates them into a product and sells or leases that product for profit. While pursuing that objective, the developer maintains a "modified adversary" approach to all other parties in the transaction to insure not only that each added idea and dollar is fully supported by the economics of the project, but that no essential ingredient or party is excluded.(fn1) This applies particularly to the process of assembling the land for the project.
Real estate as a commodity consists of the earth itself, any previous man-made improvements to the land and any of the legal relationships previously created which make up the bundle of rights through which land is legally defined. Land also has a series of economic characteristics which relate to its scarcity, income-producing potential and long-term prospects for stable valuation. These economic characteristics are a principal focus for the developer. The developer's attorney must see to it that the assumed economic characteristics are not diminished by an expensive or extended acquisition process or by legal encumbrances on the acquired land which reduce its market value.
When viewed from a conventional legal perspective, land assemblage is relatively straightforward. It includes the acquisition of fee ownership or sufficiently lengthy rights of possession to permit debt financing and amortization of that financing over the expected life of the completed project. This may be accomplished in private transactions by purchase and in sale agreements through long-term ground leases. Although the methodology may differ, the underlying transaction is the same.
Land may be owned, leased and conveyed privately. However, there are a number of public limitations to the private ownership of real estate which affect the assemblage and development process. These generally may take the form of police powers and eminent domain. Concepts of planning and zoning are specific types of police powers designed to allow the proper exercise of police powers related to public health and safety. The right of eminent domain may be exercised by federal, state and local governments, as well as by a number of semi-public organizations such as railroad and public utility companies which may exercise such power for limited purposes. In some instances private, nonprofit institutions such as universities may also have a limited right of eminent domain.(fn2)
The development of a real estate project normally begins when the individual developer conceptualizes a somewhat vague plan for its creation. The developer at the outset does not necessarily have a complete idea as to the scope of the project, its cost or the precise amount of land involved. He may be prompted by an economic need (e.g., this city needs a new hotel) or by the availability of a developable parcel of ground (e.g., a relatively large tract of undeveloped ground near an inner city). Based upon this initial information, he solicits the assistance of particular professionals to begin to create a development plan.
The first feedback the developer needs relates to the marketability of the project when completed. Since the developer at first has only a sketchy idea of what that project will be, his research involves already available marketing studies of the type of project and the area he has targeted for potential development. These studies might include public documents such as economic projections and trend studies on specific industries or certain areas of the country. These studies are often prepared by agencies of federal or state government and regional planning councils or management consultants working on their behalf.
As the initial concept takes shape, the developer specifically targets the area he intends to develop. From the
initial conceptualization, a major focus in the developer's mind is the speed and confidentiality of his development efforts. The process of land assemblage is a "raw collision of economic interests where tenants are happy to hold out for big prices and would-be buyers devise subterfuges to get their way without tipping their hands.... Developers do not like to disclose the sums that they have paid to buy out a tenant or acquire a site for fear of inflating demands in future negotiations. They are afraid of their own shadows entirely."(fn3) Developers normally assume that there is a purchase price for every parcel of ground. Unfortunately, while every owner may have a price, the developer may not have a price that, when added to other sales prices, allows for an economically feasible project.
After this initial targeting, the developer obtains a report on obligations and encumbrances ("O&E") related to specific parcels of ground. This is often undertaken with the assistance of a friendly real estate broker, attorney's office or title company. Developers occasionally undertake the preliminary O&E themselves before seeking outside assistance in order to limit public awareness of the developer's interest in the area. The initial examination of the area includes the accumulation of a list of street addresses and owners from the assessor's office, which can often be obtained in computerized form. It may also be possible to obtain each owner's name, the square footage of the site, assessed value and taxes of the individual sites. As an alternative to the assessor's data bank, many real estate brokers have this information already available in microfiche form in their own offices. The customer service departments of some title insurance companies will also provide similar information to the extent that it has been recorded through their computerized services. Copies of the relevant documents may be obtained from title insurance companies for a nominal fee. Lenders who hold existing mortgages in the area generally do not offer much assistance in obtaining this sort of information due to confidentiality requirements imposed by their governing organizations.(fn4) Moreover, lenders cannot give information without a specific loan number, and that loan number is not publicly available since it is on the note, not on the deed of trust.
After creating a detailed map of the target property, the developer should review the property in the area which has been listed and sold in recent months to obtain an approximate idea of acquisition costs. The developer increases this historically based estimate since it must be anticipated that his very actions in acquiring land in the target area will have the effect of increasing market values as each sale becomes public knowledge. If his identity can be successfully hidden during the assemblage process, there is a greater likelihood that historical land values will remain valid for the requisite period of time.
Assuming that the initial cost information obtained by the developer continues to provide an optimistic view of the likelihood of assemblage, the developer begins to work with a variety of agents to assemble the ground. These individuals normally include a real estate broker, an appraiser and one or more strawmen or nominee corporations used to hide the identity of the actual assembler. The developer's attorney will be required to negotiate contracts with each of these individuals and to structure and incorporate the nominee corporations.
In Colorado, real estate brokers have a broader authority to render services than in most other states.(fn5) While a constant repartee goes on between the legal and real estate profession as to the scope of services which may be provided by each, large-scale real estate transactions do not generally present a problem since the developer expects that his attorney will prepare and provide to the real estate broker all documents necessary for the assemblage of the ground. In fact, contrary to the situation that occasionally occurs with respect to traditional real estate broker activities, the developer of large-scale projects often seeks to convince the real estate broker to undertake actions beyond those which are normally and appropriately within his purview. However, despite the apparent convenience of using a real estate broker to provide quasi-legal services, the potential for future problems associated with such activities suggests that the developer's attorney should minimize this expansion of the broker's responsibility.(fn6)
Normally in real estate transactions, agents are paid by the seller and are considered agents of the seller. It is important for the developer, however, to retain and pay the agent himself to assure that the aggressive work necessary to complete an assemblage is undertaken and that he has full control...
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