"It is often better to offer a higher price for the land, contingent upon rezoning, than to put cash up front to control it"

 

Don C. Westphal

Dear Reader,

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Picking the right plot of land can be the single most important thing you do in the development business. Because of its importance, we will discuss three individual topics to break down this segment in detail. 

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Highest and Best Use

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Like with any large scale project, you want to be near a major employment hub. Jobs are where the population will flock to, thus creating housing demand. Along with jobs come financeable residents (i.e. a bank will offer them a home loan). We keep things simple and ask the following two questions: 

 

a) Are there jobs?

b) Are the people in this market financeable?

Keeping these 2 simple questions in mind will help you gravitate you towards high quality land. 

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Unlike a typical development project, your MHC shouldn’t be right next to where all of the action is happening. Seems strange, huh?

The reason for this goes back to a simple real estate concept known as ‘highest and best’ use. In simplest terms, highest and best use refers to the most rational use for vacant or improved property which results in the highest value. Professionals apply the following three uses on land & property to find its highest and best use.

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1. Legally allowable

2. Financially feasible

3. Highest Value

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When you compare a MHC development to other multifamily development projects on the basis of legal use, financial feasibility and highest value, MHCs almost always come out behind. Unless the plot of land is already zoned for MHC use, which is highly unlikely, MHC will rank lowest in the “legally allowable” category. Furthermore, a MHC is not likely to result in the highest form of value for the intended real estate when compared with other asset classes, like apartments, given the lower rental rates and cheaper home sale prices.

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Do not fret though. All this means is that you have to be strategic when finding a plot of land. You want to be close to everything but not too close. In other words, you want to be on the outskirts of town, approximately 20-40 minutes away from employment and a metropolitan city. In these areas, you’ll have a better chance of finding larger and cheaper plots of land than if you were competing for the “sexy” land right in town that tens of other multifamily developers are pursuing. You will also have an easier time getting Zoning approval because of less neighbors, traffic and attention. It’s a win-win situation.

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Size of the Project

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By now, you’ve visualized your ideal MHC and narrowed down plots based on highest and best use. The next step in your process is determining how big the land should be. Although you can technically build a small MHC that consists of say 25 manufactured homes, it’s not the best use of your time considering economic feasibility, cash flow potential, exit opportunities, and most importantly zoning challenges.

 

These days, we believe that a developer should aim to create a 100-300 pad MHC. You can build larger, but should not go below 100 pads. The reason being that you want to build something unique; there are very few quality 100-300-pad MHCs on the market right now. With a new development of size, you can leave your mark on the industry and create a larger more highly sought after community. The exit opportunities (and overall value) will be dramatically higher.

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The next question that you may be thinking is how many acres do I need to build a 200-pad MHC? You don’t want to place 10 manufactured homes per acre or your community will look very dense and aesthetically unpleasing - like a matchbox. A good rule of thumb is 4 homes per acre – large enough for you to have 1,400-1,600sf homes and good sized yards. Using that metric, you ideally want a plot of land that’s at least 25 acres in size, if not a few acres larger so you have room to place a clubhouse or other amenities. If you’re looking at a plot of land that’s smaller than that, it’s highly advisable to consider another. The economics will not work in most markets.

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Utilities

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As parse through hundreds of land deals, you’ll quickly realize that not all of the plots have the same type of utility access. The best situation is to find land with public water, public sewer and gas access or availability. It’s likely, however, that you’ll find an ideal plot of land with no public utility access or access to water, but not sewer and vice versa.

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You can certainly be successful developing a MHC community with no public utilities as there are solutions (i.e. building a well, a package treatment plant and using electric instead of gas). But, given the level of headaches already involved with the project, it’s probably best to find a plot of land with at least public water or public sewer access. Private utility systems are expensive, can take over a year to obtain approvals to build and require ongoing regulatory compliance. For example, a treatment plant will cost approximately $1.5mm for a 150-pad community. It will take about 18-months for approvals from the Department of Environmental Protection (DEP) and require ongoing permit renewals and inspections. Likewise, a well water system can cost upward of $100k for a 150-pad park, take about 12-months for approvals from the DEP and also require ongoing permit renewals and inspections. If you are in the fortunate position of being able to chose, always go with public access. 

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Other Items

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Other things to take into consideration when shopping for land is farm land preservation. We are sure that in your search for the ideal plot of land, you will come across a perfect plot of land that’s priced below market value. This plot of land is most likely *preserved* farmland. Unfortunately, these plots of land will not work for your MHC development endeavor. They are land strictly for farmland use and cannot be re-zoned. Make sure to ask if the land is preserved or not before wasting any further time on due diligence or negotiations.

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If you’ve found a plot of land that works, make sure to ask the Seller if a soil test has been conducted recently. The best soils to develop on include loam, bedrock and sand. If the Seller does not a have a soil test handy, talk to a local excavation company to gain an understanding of any underground hazards in the area that you should be aware of before proceeding. For example, the Lehigh Valley metro in Pennsylvania has the perfect geology to make cement. Rich limestone reserves, which are a key ingredient for cement making can be found under much of the land. While cement has been a part of Lehigh Valley’s rich history for more than 150 years, it can be serious trouble for developers who aren’t careful and find limestone under their site. You cannot rely on a simple 4 corners test as it’s not comprehensive. Instead, you want to conduct a rigorous test throughout the plot of land, even if it means more money upfront. Also, ask the excavator to go deep in order to avoid any potential pitfalls when you begin development.

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Lastly, do not put up a large sum of non-refundable money to tie up a piece of land. Negotiate a deal with the Seller that is contingent upon Zoning approval, even if it means offering a higher purchase price. Regardless of how confident you are in obtaining Zoning approval, you should never underestimate the Zoning approval process.

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Best,

RMR-Development Team

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