A builder builds you a house, you move in and it becomes a home. But what happens before the builder gets started? Most often a land developer, who sometimes is the builder as well, played a major role in preparing your lot for building. The Canadian Home Builders’ Association membership comprised of builders, land developers and various sub-trades and professionals, who, as an industry, develop complete communities. Now let us examine the major role the land developer plays in the process of developing a subdivision before the builder gets started.
Not only is the land development process lengthy and expensive, it tends to be the most risky task in the development of a neighbourhood. Some of the development expenses incurred relate to planning costs, payment of fees, environmental assessments, obtaining approvals, engineering, construction costs, financing costs and dedication of up to 10% of the development as land for public purposes. The following is an attempt to give a high level overview of the process from land purchase to delivery of the final product to builders in the form of development ready lots. This will give you, as a present or future homeowner, an appreciation of the land developer’s major role in building a community for your home.
After the land for a development is assembled there are a number of steps required to take the raw land in a municipality to a development ready state (building permit ready) assuming, as a prudent developer would, that a high level market study shows the project is viable:
- Rezoning and municipal plan amendment, if required
- Obtaining subdivision approvals
- Engineering and arranging financing
- Construction of services, utilities, roads and other infrastructure
- Arrange bonding, insurance and enter into a developers agreement
- Finally! .... marketing the building permit ready lots.
Where rezoning is required to develop a subdivision it may also involve a municipal plan amendment. The legal processes are set out in the Community Planning Act which is often referred to as one of the most complex pieces of legislation in New Brunswick. This process adds a series of complexities to the approval process as the review, public notices, and public hearings involved can be very demanding. Substantial detail can be required to accompany the application and studies may have to be carried out at the developer’s expense to address potential issues. Extensive interaction between the developer, municipal staff and the public is usually required. Hearings before the local planning advisory committee and municipal council are part of the process. Depending on the jurisdiction the process can take several months and up to a year or more if delays are encountered. If approved, this gives the developer the right to apply for development approvals through the subdivision approval process.
The subdivision approval process requires less time to go through than rezoning but the interaction between the developer, municipal staff, the public, and meetings before the local planning advisory committee follow similar processes. The developer is required to submit a much more detailed set of plans and other information for the review by municipal staff. This all takes time and money and during this markets can change.
Among other things, these all add to the up front and long term cost to develop communities. As I mentioned, land development can be a risky proposition. Tax treatment for a land developer is also burdensome. Most business expenses can be claimed in the year incurred but land development costs can only be claimed in the year each lot is sold. As a result a prudent developer on any size of project will want to maximize profits, minimize risk and control his cash-flow. This means identifying and developing the best scheme for the local marketplace, while satisfying the local planning process. These are some factors that make arranging financing for developments difficult.
Next detailed engineering plans for infrastructure and lot preparation are completed and costing is revisited. Assuming the market study shows the project is still viable it is time to approach lenders. For banks or institutional lenders to be interested in land development lending there needs to considerable cash invested in the deal by the owner and/or developer, and there needs to be a strong exit strategy supported by binding pre-sale agreements.
In many cases, there are good development projects that cannot quite meet the requirements of an institutional lender. Land development financing often requires private mortgage lending. This usually comes in the form of considerably higher interest rates and equity commitment adding to the developer’s challenges. Private lending is sometimes preferred as the private lenders that would be interested or prepared to fund a land development financing deal are likely going to be comfortable with both the project and the market and regulatory dynamics that still need to be dealt with by the project owners.
Once financing is in place a land developer can get on with construction of services, utilities, roads and related infrastructure. Many developers find this to be the easier and more predictable phase of development as most of the uncertainty has been removed and it is a matter of getting the work completed.
Some of the routine steps such as arranging bonding, liability insurance and entering into a developers’ agreement with a municipality are completed. Upon substantial completion of the construction, all infrastructure (services, utilities, roads etc.) that has been paid for at the developer’s expense is turned over to the municipality at no charge!
Finally! .... The developer is in a position to sell the building permit ready lots. If market conditions have changed for the better a successful project is born. A downturn in the market can prove disastrous.
Did I mention that land development tends to be the most risky function in the development of a neighbourhood?
As New Brunswick President of the Canadian Home Builders’ Association it is my privilege to serve the members who strive for excellence in home building and carry out environmentally responsible land development activities as they build communities for you, our customers, the home owners.
Written by Rick Turner, CHBA-NB Past-President