The red flags you may encounter when you are pre-evaluating parcels to purchase for real estate development can be obvious, subtle, or in between. The first two articles in this series addressed a variety of challenges presented by the physical characteristics and environment of a parcel.
This article focuses on potentially large problems caused by limitations initiated or agreed to by the current or former owner of the property that could make it difficult or impossible to implement the desired real estate development. These restrictions have nothing to do with zoning or other municipal ordinances. One type consists of deed restrictions or covenants that would presumably be revealed through the title search you would have performed on the property once you have signed a purchase contract with the owner.
Generally, restrictive covenants are provisions registered against a parcel and mentioned in the deed that specify some affirmative or negative requirement regarding the use or development of the property. An affirmative covenant could be one that states that any structure built on a parcel must be at least 3,000 square feet. foot in size. An example of a negative covenant would be one that prohibits the sale of alcoholic beverages on the property, even where that use may be permitted by current zoning classification. You can read a more detailed discussion of deed restrictions and their implications for land development in the article titled “Some Controls on Development Property.”
Here’s the catch: sometimes there are binding restrictions that you can No find anywhere in writing. These can be official notes on plans or written conditions agreed to by the owner where the parcel has gone through a subdivision or some other municipal proceeding in the past, such as a complete zoning change or the granting of some type of variance. If you don’t do your research carefully, you may not find out about them until after you’ve wasted a lot of time, effort, and money.
I once found a parcel that looked very promising for development. Speaking with the seller’s agent, I learned that the property (which was owned by an estate) had undergone a recent subdivision and had been separated from a smaller parcel. Inexplicably, a red flag appeared in my mind. He had a feeling there was something below the surface of the subdivision and he needed to investigate it further. So I looked at the deeds to the two parcels but found nothing unusual. This surprised me, but I was not yet ready to conclude that my instincts had been wrong. Then I went to the municipal building and looked at the development file and the plans that were approved at the time the subdivision of two parcels was made. (This is public information). What I found was a note on the subdivision plan specifically forbidding the further subdivision of any of the parcels, as a result of one of the conditions set forth in the approval letter that had been signed by the representative of the estate.
The municipal subdivision, development, or use approval process is largely a negotiation between the property owner and the local government. Each side wants to get the most favorable terms. When a municipality approves a plan (or grants a variance), it usually places conditions on it. In the case of the property parcel, the local government saw an opportunity to get something it wanted (i.e. no further development of the two parcels), so it conditioned its approval on the property owner’s acceptance of that restriction. The inheritance applicant did not understand the far-reaching implications of accepting the municipality’s condition. All he wanted was approval to subdivide two parcels, and he got it. What he also got was a significant decrease in the value of the two parcels.
When you’re investigating, you need to tenaciously uncover all the facts. You must verify the accuracy of the information relevant to you and not just assume it is valid or accept rumors as true. From time to time, you may also have to play a hunch. Do your research carefully, but also listen to your gut.
