When comparing competing sites for land acquisition, it is very important to analyze all of the site specific costs to make a true comparison. The price per square foot for the real estate is just part of the picture. It’s also essential to consider the project-specific costs so the sites can be compared side by side.
There are many different “hidden” costs that can apply to a site, but here are some of the most common.Off-site Infrastructure Improvement Costs
Have you ever found a piece of developable land that initially looks great, only to discover it isn’t served by public sewer or that a nearby intersection has a failing level of service and requires improvements? Unforeseen off-site infrastructure improvement costs can turn a profitable venture into a losing proposition. Traffic signals, lane widening, curb, gutter, sidewalk, utility extensions and off-site storm drainage facilities add up quickly. Identifying these issues prior to purchase is worth whatever time and money it takes, if for no other reason than peace of mind.
Even if your site is adequately served, it’s possible that another developer paid for the infrastructure, so always be on the lookout for latecomer fees. The county or city in which the property is located should be able to identify any such fees.
System Development Charges and Impact Fees
System development charges (SDCs) for water, sanitary sewer, and storm drainage are the fees assessed on the proposed development to pay for required public infrastructure. Every jurisdiction has different fees based on a standard metric of one equivalent residential unit (ERU). The system development charges can be hundreds of thousands of dollars for large projects like warehouse facilities.
Impact fees (traffic, school, and park, to name a few) are also important to consider. Traffic Impact Fees (TIFs) are usually the largest and are based on the number of PM peak hour trips a proposed development is expected to generate. If your development will produce a lot of traffic, anticipate a big TIF. Some jurisdictions provide TIF credits for off-site frontage improvements a developer pays for, which allows you to reduce your overall TIF in proportion to the level of off-site improvement. If you can take the time to rough out the off-site improvements for each site, you can better estimate your net TIFs after TIF credits are applied.
Another piece of advice: know your jurisdiction, because SDCs and impact fees vary between jurisdictions. For instance, on a large warehouse and distribution facility I worked on in the Puget Sound market, several cities were compared for the identical project and the cost of SDCs and TIFs ranged from $0.48 a square foot to $1.62 a square foot. When the site area is over four million square feet, that is real money.
Besides obvious soil concerns like infiltration rate and water table, sites in river valleys typically require surcharging the building pad area to compress the soils to reduce the risk of differential settlement. On the other hand, sites that are located on gravel soils or sites that were previously consolidated by glaciers typically do not require surcharging. Gravel sites also allow construction year round, which will greatly expedite a construction schedule.
Dry utilities, such as power, gas, cable, and telephone, also need to be considered. Although line extension allowances are typically provided by the power and gas purveyors, from time to time power and gas infrastructure needs to be upgraded for individual sites. Upgrade costs can quickly add up.
Land development can be a tricky business, and selecting the right property is one of the trickiest parts. Even if two sites are equal in purchase price, they may not be equal when it comes to costs like system development charges, traffic impact fees, soil surcharging and off-site infrastructure. A detailed feasibility study is your best friend. By taking the time to research and quantify these costs on a per square foot basis, you will be able to compare all of the costs for each site and understand the true effective cost of acquiring a given site.
In short, dig deep into the property before digging deep into your wallet.
Interested in more useful land development content? Check out our series, The Eight Traits of Successful Developers.
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