Development and redevelopment projects continue to be the real estate investment alternatives with the most lucrative return potential. Consequently, however, development and redevelopment projects bear the greatest risk and are generally left to only the most experienced real estate investors. Many investors fear these types of projects for several reasons: 1) they typically involve large cash outlays up front and throughout the duration of the project, 2) most, if not all, of the return associated with such projects is typically not realized until the completion of the project, and 3) most investors are not familiar with the financing, regulatory requirements, project management competencies, and steps involved with undertaking such projects-and in our business, what you don’t know CAN hurt you. This article is intended to provide a general synopsis of the development process so that investors will have a basic understanding of it.
The first step in the development process is to define the project. Within this step, the investor will need to determine whether or not the project will require a permit. Permit requirements depend upon the scope of the project or location-related constraints. There are No-Plans Permits for simple projects that do not require plans such as plumbing or electrical, Over-the-Counter Permits for simple projects such as minor additions or simple remodels, and Large Project Permits for more complicated projects such as subdivision of property, extensive remodels, or construction of new structures that will require that plans and documents be submitted for review. It will well be worth the investor-developer’s while to carefully review all relevant documentation that pertains to permit application, exemptions, and approvals within the locality of the proposed project.
The investor-developer’s next step will be to determine the property’s zoning and other site criteria to adequately evaluate any site constraints. This step of the process can range from simple to extremely complex, but the investor will generally need to complete it before the city will issue an approval or a permit. Most property in the city of San Diego is assigned one base zone, although some properties have more than one base zone. Base zones identify the uses allowed on a property and the development regulations that apply to the property. Overlay zones, which may modify the provisions of base zones, are applied to some properties. Most property in San Diego falls into one of the following types of base zones:
Residential – Areas designated for single and multi-family residences.
Commercial – Areas intended for businesses which provide consumer goods and services as well as a wide variety of commercial, retail, office and recreational uses.
Industrial – Areas intended for research and development, factories, warehousing, and other industrial uses.
Agricultural – Areas now used for agricultural and farming purposes which may be developed for urban use sometime in the future.
Open Space – Public recreational uses or area to be left in a generally natural state. In addition to zoning, the investor-developer will also be responsible to research property deed and title information for easements recorded on the property. Separate approval is required from each utility agency or private party for construction of improvements in easements, but structures in easements are typically not approved.
Still, other site criteria may dictate that additional approvals or permits may be required such as a proposed project for a property that lies within the Coastal Zone that may require a special Coastal Development Permit prior to development. The prudent investor-developer will want to contact the city and review any copies of prior permits, maps and drawings relevant to the property. Careful research in this area can preclude costly miscalculations with regard to development projects.
Depending on the site conditions for the proposed development project, it may be necessary for the investor-developer to obtain discretionary approval before commencing development through a process known as Discretionary Review. Discretionary Review is a higher level review of the proposed property use and architectural and design plans. The decision maker must be able to make certain findings and may exercise discretion in granting approval of the proposed project. If an investor-developer thinks his or her desired proposal would require discretionary approval(s), he or she may want to consider submitting the project for a Preliminary Review-a process that will indicate if any discretionary approvals are required and provide the investor-developer with an opportunity to discuss his or her project proposal with review staff.
During the next step in the investor-developer’s process, Plan Review, plan reviewers determine whether the proposed project conforms to development standards and codes and if a construction permit can be issued or a map approved. By this step, the investor-developer should have contracted for the necessary designers to prepare any and all construction and/or mapping documents that will be submitted to and reviewed by City staff. There are numerous types of approvals and these will determine the submittal requirements and disciplines involved in the review. Each of the disciplines involved in the review will either sign-off or return marked-up plans with an issues report that contains items that must be addressed prior to obtaining sign-off.
Once all disciplines have signed off on the proposed project plan, the investor-developer is now ready to schedule an appointment to obtain the required permits and/or approvals. At this appointment, there is a rather long list of documents that will be required for permit issuance (commonly called Stamp Out) that will be reviewed for completeness. Once the reviewer makes the determination that all documents are complete, the investor-developer will receive 2 sets of plans with approval stamps, an inspection plan that will indicate at what stages inspections are required for the project, an inspection record card that the inspector will sign as the construction is inspected and approved, an electrical circuit card that must be completed prior to calling for an electrical inspection, and an invoice for fees.
The investor-developer will need to coordinate all inspections throughout the construction of the project with the City who will generally offer a full range of inspection services. After all inspections are completed, the city will issue a Certificate of Occupancy that must be obtained before a building can be occupied. An investor-developer may obtain a Temporary Certificate of Occupancy when the inspector finds that no substantial hazard will result from occupancy of any structure or portion thereof before all work is completed. Otherwise, a Regular Certificate of Occupancy will be required.
As you can see from the above synopsis of the development process, there are many steps involved. Each additional step in any process incorporates with it more risk in the process itself. If you are considering a development or redevelopment project for your next investment because of the potential for extremely high returns, proceed cautiously. Do research before you embark upon it and contact us so that we can assist you.
“Earning You Many Fond Returns…”