Residential Land Development

Residential land development is not an easy business. There are many factors to take into consideration before taking the big step to develop an unimproved parcel. First and foremost are the market conditions. Consider the type of development that is best suited for the piece of land, and whether it will meet typical lender requirements of one to two sales per month [also known as the rapid absorption requirements].

Most of the the available land in Anchorage and Eagle River are smaller, infill parcels, zoned medium to higher density residential, which lend themselves to development of 3 to 6 units per acre. However, lot size, soil conditions and location of utilities are also major factors affecting the ultimate value and cost of the developed individual building pads. Offsite costs [including the extension of water and sewer and sometimes the paving of roads and alleys not adjacent to the property being developed] frequently are a financial obstacle to development.

Assuming you are going to borrow money to acquire and develop the parcel, the lender will require a one to three year pro forma, depending upon your estimate on the time it will take you to sell out the development. Each building pad or lot will need to be identified with a value, substantiated by an appraiser. The cost of the appraisal will vary depending upon the size and scope of the development but a reasonable cost estimate would be $8,000.

Other organization and financing costs include the interest expense for the loan, the loan origination fee and extension fees because the timeframe for land development loans is typically nine months to a year and frequently have to be renewed. Other finance and organization costs include title insurance, real estate taxes, legal and professional fees. Most developments are organized with their own LLC and therefore require attorney preparation and individual tax returns.

Development and construction costs include permits/inspections/engineering review fees by the municipality of Anchorage [MOA]. These costs will vary depending on how well your engineer prepares his civil documents. More than one review, and there is always more than one review, adds to the MOA fees. There are also platting and rezoning fees because your development must be approved by the appropriate MOA board or commission. Engineering fees include civil, electrical, utility and soils testing plus engineering construction management which can amount to as much as 8 to 10 percent of the retail value of each lot.

Construction costs will vary depending upon the width of the lots and soils conditions. Today, construction costs can be anywhere from $50,000 to $75,000 per lot. And then there is the contingency line item on the pro forma which is always required by a lender. This number can be anywhere from 3 to 8 percent of the development and construction costs, depending upon the financial strength and experience of the borrower and how comfortable the lender feels with the marketability of the development.

Finally, there is the cost of management, the sale and marketing to create name recognition within the real estate industry and community. That expense can be anywhere from 3 to 6 percent of the retail value of the developed lots.