Thorough due diligence is an essential risk mitigation strategy that all purchasers need to undertake before acquiring a property. For developers, it is an opportunity to test a project’s viability and identify key risk items that may impede or prevent a project’s completion and you ability to obtain finance.
Due diligence should include an investigation of both the physical and ‘paper’ attributes of the property spanning everything from the contour of the site, relevant zoning rules, and the certificate of title.
In this article we focus on site specific considerations, noting that general market research is equally as important in delivering a successful product to market. This would include researching local demographics, pricing factors, design preferences and more.
Let’s take a look as some fundamental areas of due diligence that you, the developer should be reviewing.
Traffic & Transport
Site accessibility, safety, road frontage, and general surrounding traffic flow will all contribute to the final design. Developing a property that significantly increases traffic flow in an area that already has high levels of traffic flow will be commensurately more difficult.
Keep in mind that a transport assessment reports form a key part of resource consent applications. Local councils will need to see that your project is designed in a way that meets minimum safety standards, and that the resulting increase in traffic flows will not have a negative impact on the immediate environment (among other things).
Availability of Services
Understanding where utility connection points are located and how you may connect to them is an essential part of due diligence. Review connection points for stormwater, wastewater, general water, telecoms, power, gas and fibre and more. In an ideal world, services will be located nearby and not require complex solutions – however this is often not the case.
What to look out for
- Services that are located far away or on main public transport routes (that may require complex Traffic Management Plans)
- Services that require extensive upgrades – this may include wastewater or stormwater upgrades, transformer upgrades or undergrounding overhead powerlines.
- Services that require access to a neighbour’s property – neighbours can be inherently difficult to deal with. If given a choice, most are inclined to not agree to a substantial development occurring next to their back yard.
- Sites that have a challenging contour or sit below the road – such sites may issues with invert levels. Incorrect invert levels may require you to install pumps on site or may even prevent development entirely.
What happens if services aren’t available
It is not a given that existing council infrastructure will have sufficient capacity to accommodate additional connections, despite zoning rules allowing the increased density!
Insufficient network capacity may require you to:
- extensively upgrade (council) assets before connecting,
- reduce the number of units you can build, or
- in severe cases, prevent you from developing at all.
An engineer’s report should quickly identify any capacity constraints you may face with existing infrastructure as well identify the best means to connect to said assets.
Note, if any of the above factors reduce the total number of dwellings you can build on the site (which drives the projects revenue), then you will reconsider what you are willing to pay for the site.
Zoning & Overlays
Simply put, a property’s zoning will dictate what you can use the property for, and what you can build on theproperty. As a developer, a high-level understanding of relevant zoning rules will enable you to quickly assess:
- How many lots a site can yield, an
- Potential typologies (both of which will inform revenue assumptions in your feasibility).
Why zoning matters
What you build will impact what you can sell for ie. your revenue. Incorrect revenue assumptions will undermine a project’s profitability. It is important that expert advice is sought – both your architect and planner can give guidance around more complex planning rules such as: height in relation to boundary (HIRB), minimum set back and outlook provisions, and more.
Other special features
In addition to planning rules, local councils provide data as to other special property features. This may include special character areas, flood plains, overland flow paths, erosion & slips, wind risk and subsidence, protected trees and more. Each of these special features will impact the developability of you project – for example, a property located in a flood plain may require you to raise the floor levels of a proposed building. Overland flow paths may dictate the positioning of certain build footprints. Erosion and slip risks may dictate a specific foundation design. As you can see, planning is a complex area that often traverses other area of expertise (such as engineering).
Improvements
Improvements on a site are often removed to maximise the sites full development potential. Hence understanding the cost to remove such improvements needs to be considered. This will likely be influenced by the size of the structure and type of material used.
It is important to identify any contaminants (such as asbestos) that may increase demolition costs. If you are retaining the improvements, then it is critical to ensure that building is structurally sound and fit for purpose.
Land Area & Yield
Consider the gross area of the property. Council planning rules often have maximum site coverage rules which will influence the density of any proposed development. It is also important to consider what the net developable area is—as some areas of a property may not be developable due to its topography, restrictive easements or covenants. It may transpire that the net developable area of the property is significantly less than the gross area stated on the record of title. This is important as it net developable area will drive how many subdivided lots you yield from a site.
Topography
Considerations here extend beyond the sites contour and relevant cost assumptions for earthworks and retaining. It almost a given that steep sites will be more costly to develop. An often overlooked aspect of development is how a sites topography impacts the design and installation of stormwater and wastewater assets.
Most stormwater and wastewater connections rely on a gravity-feed systems, so sites that fall away from main connections points will require pumps to assist with flow. In some instances, pumping may not be feasible, rendering the entire site un-developable.
Lastly, the site contour will also likely impact stormwater runoff & overland flow paths (if any). Check the council overlays as these elements will likely need to be factored into your projects design.
Vegetation
Vegetation is really no different to existing buildings or structures. You may wish to retain some vegetation as a means of adding character or value to the project, however it likely that some (if not all) of the existing vegetation will need to be removed to enable re-development.
Reviewing council overlays will reveal any protected trees or native bush areas on your property that may prevent or limit re-development. An allowance for an arborist and landscape architect should be included in your budget, in addition to landscaping soft costs.
Lastly, observe trees which border your property as there may be setbacks requirements from neighbouring tree drip-lines.
Soil & Ground Conditions
Soil and ground conditions are one of the greatest unknowns for any development. While desktop analysis can shed some light on likely ground conditions, invasive testing is the best way to mitigate ground risk. Even then, invasive testing done a ‘sample’ basis meaning that ground risk cannot be eliminated entirely, and contingency sums should be allowed for in the budget specifically for this purpose.
Geotech findings should identify any site remediation that may be required as well as make recommendations to the foundation designs. Keep in mind that a formal Geotech report is required for most resource/building consent applications.
Right of Way (ROW) & Access
Subdividing a property that is located down a shared Right of Way (ROW) can be complex. While ROW’s are put in place to ensure legal access, using an easement for anything other than its intended use may give rise to dispute. For example, subdividing a property that results in an increase in the number of vehicles that use a ROW could be considered use of the easement in a materially different way.
Furthermore, such subdivisions usually require the driveway to be upgraded (which may require neighbours consent). While subdivision may still be possible, it is best to avoid instances where conflict is a likely outcome.
Properties that have shared driveways should be treated with extreme care – where relevant, contractual agreements put in place to ensure access.
In addition to rights of way, consider how easy it is for the contract to access and work on the site? Can trucks access the site to deliver material? How will you neighbours be affected? These are some some of the questions that need to be answered.
Land Information Memorandum (Lim)
A LIM report is issued by a local territorial authority and is a summary of all the information council holds on file in relation to the property (for a more complete record of information you can considering a Property File).
Most of the information found in a LIM is available from public sources includes building and resource consents, zoning and planning information, special property features, rates information and more. That said, the way the information is packaged makes it convenient and essential reading as part of any due diligence.
Record of Title & Legal Considerations
Legal checks predominantly relate to your properties ‘record of title’ (previously certificate of title). This is an extremely important part of due diligence that requires careful attention – errors or incorrect assumptions made here may entirely prevent your development from proceeding.
The record of title proves the ownership of the land and details any rights or restrictions that apply to the land.
A high level review will quickly reveal the type of ownership interest (freehold, leasehold etc), the land area, legal description, DP plan, and more. Perhaps one of the most important part of a title review lies in establishing what other registered interests are attached to the land.
Interest in the Land
This includes registered interest such as easements, land covenants, consent notices as well as unregistered interests. It is important to carefully review all interests (‘instruments’) noted on the title as they can dramatically affect the development feasibility of a site.
Easements
Easements grant the right to do something on someone else’s land or burden your land by granting a right to another landowner. When planning a development understanding what rights (or burdens) are placed on your property will have material impact on a project design. Keep in mind that you are often not able to obstruct or build over easement areas granted to other parties over your land.
Land covenants
Land covenants are rules that affect how you may use the land. The covenant may make you do something (positive covenants); or prevent you from doing something (restrictive covenants). Example of land covenants include preventing the ability to further subdivide the property, enforcing minimum building floor areas for new dwellings (common in new subdivision) and enforcing specific design guidelines.
Limited as to Parcels
Do a quick check to ensure the property is not ‘limited as to parcels’. A title that is ‘limited as to parcels’ means when the title was first issued, a guaranteed title could not be issued due to insufficient survey information or someone else being in adverse possession of part of the title. Cadastral survey data will need to be provided to LINZ to establish your properties boundaries before it will issue a guaranteed title. For obvious reasons, it is critical to establish your properties boundaries before commencing a development.
Conclusion
Due diligence should inform your investment decision – it is an opportunity to systematically refine revenue and cost assumptions relating to your project, giving you an more accurate idea as to the overall profitability of the project and ultimately its viability. Site attributes that (i) increase costs, or (ii) reduce revenue, will ultimately reduce the projects profitability and subsequently the amount you should pay for the site.
Due diligence is not only about the now – it is also about paving a pathway forward. Uncovering potential issues before construction commences give you time to adjust and improve your development plan to ensure the best chance of securing development funding.
As Abraham Lincoln famously said; “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.”