We admit that the idea of pouring over documents and information as part of due diligence for your next land development doesn’t exactly get the juices flowing.
What should get your juices flowing, though, is the reliable truth that adequate due diligence before undertaking a property development will help you maximise profits and avoid major problems down the track.
In truth, methodical due diligence is a key method that successful developers use to ensure they are getting into the right projects, at the right cost, with the right intentions.
But how do you ensure your rights to conduct good due diligence, what should your due diligence process cover, and how can it actually help?
Ensuring your Right to Conduct Useful Due Diligence
If you’re getting into a large project like property development, there could be a lot of relevant information that isn’t publicly available.
Plus, often a seller doesn’t want to spend time and money answering your questions without:
- Some kind of confidentiality agreement in place; and
- Some degree of commitment from you.
Because of this, sometimes you’re going to find that your due diligence actually takes place in two phases. First, seeing whatever publicly available information there is on which you can make an initial level of commitment. Next, having access to what might be more detailed information from the proposed seller once you’ve indicated you’re serious about moving ahead but still have questions that need answering.
To get to phase two, you’ll typically have some kind of terms sheet, heads of agreement or potentially even a contract in place.
If you want to lock in a deal but still need more information, the important part here is to ensure that your agreement allows you:
- Time to conduct your further due diligence;
- Access to information, including a requirement that the seller provide anything you ask for in a timely fashion;
- The ability to get out of the contract with no or minimal penalty if you find something hairy in your investigations.
For this article, we’re not going to split hairs between those two phases, as each project is going to be a bit different.
Checking the Legal Fundamentals
The first things you want to double-check are the basics of the transaction – the land, its owner/s and any registered interests that affect it.
This information will simply give you the lie of the land (so to speak) in terms of who you’re dealing with and what might need cleaning up.
In simple terms, you want to know:
- how is the land made up, and whether it’s the space you think it is;
- who owns the land and how they make decisions; and
- whether the land you’re looking at affected by interests in favour of banks, third parties, government bodies, angry creditors or anyone else.
If you don’t have the internal systems set up to check these out, your development lawyers will conduct some simple searches and give you these details.
So, for example, if you’ve been dealing with Bob, and your searches reveal that the owner of the land is Tina Pty Ltd, a company of which Bob’s business partner Tina is the sole director, then you’ll want some comfort that Tina is on board with the deal.
Similarly, if there are 5 registered mortgages over the land you’ll probably want to be sure that there’s nothing strange going on in terms of clearing those out on settlement – it’s not necessarily a red flag, it’s just an opportunity to ask for clarification.
Planning
If you’re a developer, this one won’t come as any surprise.
After all, developers buy land for one dominant purpose – to develop things on it and make money in the sales process.
So you’ll need to know what the local laws and town planning requirements allow you to use the land for, or could allow you to use the land for if you make the right kinds of applications.
With that in mind there are two questions:
- What is the land capable of being used for right now?
- What town planning scheme applies to the land, and with that in mind what do we think it could be used for in the future?
This is where a good town planner will go a long way. They will help you identify the scheme and conceptualise what might be possible with the development.
Ideally, you want to have this phase bedded down before you’re locked into the purchase, because what happens here can dramatically impact your end profitability.
Of course it’s not always as simple as “build as many lots as possible”. There are multiple business factors at play:
- Building more lots might require upgrades to local amenities, which will cost more money to build;
- What kind of assessment process will there be?
- Is the local council renowned for putting crazy conditions on development or not?
- Do you need to anticipate a trip to Court to argue conditions and factor those contingent costs in? What happens if you lose?
- How could that impact the timing of your project and the overall finance costs of any additional time?
These are detailed discussions and each case will be different. Taking the time and advice to have a good handle on the town planning opportunities and risks before being locked into a contract is a solid decision.
Utilities
What you can and cannot do with your development is going to both impact, and be impacted by, the situation with utilities.
Is power above ground or below? Are there plans for multi-storey buildings and can the utilities presently available (if any) support that? What is the situation with internet and what providers/speeds/modes are available?
Are there current plans by any major utility providers to change things in the area?
Knowing where the current utilities are on the site and what plans there are for the future needs to then be factored into your overall design and plans. Naturally the potential costs of moving these essential services can be significant, so changes in that regard need to be folded into your overall business plan.
Is the Space Accurate?
It’s relatively common to find that what you think you’re looking at isn’t precisely what you’re buying.
Sometimes walls have shifted or neighbouring builders have taken liberties with the boundary line.
It’s critical to get accurate survey plans drawn up of boundaries, and soil and comprehensive geotechnical investigations within the property.
Unfortunately many developers have faced serious issues because minimal soil testing was done and only later it was discovered that a volatile soil type changed the entire scope of the project once things were already underway. This can be devastating for profitability.
Getting good surveys and testing ensures you’re going in eyes wide open on the site conditions.
Can you Actually Build It?
With all of these things in mind, a very practical question arises: how’s the building process going to go?
Perhaps you already have a builder you work with regularly, or internal expertise to scope out some of the potential issues.
But either way, factoring in things like site access, material availability, security and safety measures needs to be part of the early due diligence process. This can add substantial costs to a project and sites can vary widely.
And… The Rest
Developing property is a complex affair – which you probably already know.
There are a raft of regulations, registers, issues and compliance that need to be considered as part of any potential new development project.
So while we have hit on the high points in this article for conducting some important due diligence before your next project, having a good team of development lawyers, town planners and contractors on board in the early stages of due diligence is going to help you immensely down the track.
It might also help you flush out a good reason to walk away from the deal before you’re committed. After all, sometimes the best deal is the one you don’t take!