November 26, 2016
We would not be the first to use the phrase: “You don’t know what you don’t know,” but this is never more true than in the setting of planning and executing on new construction, residential and commercial.
As a general rule, new construction can be had in four different contexts: (i) building on “raw land,” (ii) building on a “developed lot,” (iii) building on land that has an existing building that will be demolished and (iv) renovating an existing building. Compared to the relative ease of buying and using an existing building, each of these can be fraught with risks and unexpected costs.
Let’s first address the “relative” ease of buying an existing, occupied building. Now, don’t misinterpret what we say here: You should always thoroughly “kick the tires” in every purchase. Comprehensive “due diligence” is prudent in every transaction to find construction and maintenance defects, environmental problems, and zoning and other regulatory issues. But having said that, it is at least possible to look at, touch, feel, and inspection existing building, whether a single family home or commercial structure. The longer it has been there, the more likely it’s not going anywhere. You can check the building and zoning file of the applicable City, Village or Township to see if the existing use has been cited as being in violation. Buying land for new construction is in some ways more complicated.
So, a buyer looks at land and sees no building. Is that “raw land” or a “developed lot?” In the terminology used in this blog post, the distinction between a “developed lot” and “raw land” is the “full development” of the site with roadways and utilities (water, sanitary sewer, gas, electric, telephone, and cable television) and properly addressing stormwater drainage and detention. Also, typically zoning approval for the intended use of lots has been obtained before the “development” of the land and the cut-up of the same into lots. On the other hand, “raw land” is just that — land without any improvements on it, underground or otherwise.
In the case of “raw land” there are a host of potential pitfalls to achieving a final new construction product:
- Zoning: Is the proposed use permitted and are proposed lot size, setbacks, and other variables for the proposed use permitted?
- Utility access: Are public utilities available at the property line of the site (and indeed how much will it cost to extend it to the building). The party who develops a site is usually responsible for (a) obtaining easements for and (b) paying the cost of extending public utilities to the property line and to the building itself.
- Soil conditions: The suitability of soil for new construction is a significant variable for new construction. In short, virtually every piece of land can be built upon from a physical perspective, but one may have to dig, bore, pier, bridge and engage in other engineering techniques to make that possible. And the cost of building that proper foundation for the new construction can exceed the cost of the land and building. Further, if the prior owner has moved and compacted sills not he site, it can significantly exacerbate the problem. When a developer piles soil that is not acceptable compacted, it forces the builder to escalate or pier down to an acceptable depth before starting the construction.
- Buried waste: In addition to soil problems, it is not at all uncommon to find all sorts of buried materials on what appears to the naked eye to be an open field or pasture. I have been hired by several property owners seeking to put a pool in their backyard to find buried buses, trees, and blacktop. This is because when a developer “scrapes” a subdivision to build roads and other improvement, it is common to show all this debris into a “bury pit.” Other subterranean gems my clients have found have been concrete chunks or rip rap, buried tires and even elephant carcasses and school buses (I do not make this up).
- Title problems. As is addressed in this blog entry, there are a host of title problems that can arise in the new construction setting: An unreleased mortgage, an unreleased dower interest of a spouse, easements both of record and prescriptive, and adverse possession claims. In addition to “running title,” a buyer should obtain a proper survey of property to assure that there are no encroachments upon property he intends to acquire.
In the case of buying a “developed lot” in a subdivision — residential or commercial — the same variables are typically present. Again, typically zoning, utility availability and storm drainage are addressed in the “development” and “subdivision” process, but the other issues can be of concern. We were recently approached by a client who inherited a residential lot, but the lot was too narrow for construction of an appropriate residence. Another found buried tires on the site. A third found that the developer had not properly compacted the soil, requiring expensive excavation and foundation work. Further, new subdivisions frequently (almost always) are accompanied by a set of covenants — enforceable by the developer or neighbors — on the design and use of new construction.
Other clients buy one or more existing structures with the intention of demolishing them and building on the newly-cleared land. In these circumstances, there may be restrictions (such as historic districts) that prevent demolition. Further, when old buildings are demolished and replaced, the new construction may need to comply with entirely new set of restrictions than the old building in terms of lot size, setback lines, building height, building materials, covenants, and building code issues.
Renovating existing structures involves a whole new level of intricate issues. When renovation is sufficiently significant, an entire floor, improvement or even the hole building then has to be brought up to new building codes. Further, in tearing out old improvements, there are as many or more surprises — structurally, with mold and hazardous materials (asbestos is common) — than with developing raw land.
A client and friend preaches repeatedly to me that he has learned — from experience — to be skeptical. Your eyes are lying to you. Behind the walls and under the ground, in regulatory restrictions and site limitations, don’t believe your own observations alone. Rather, work diligently before buying property and certainly before digging into the ground to learn all of the pitfalls and variables of the site. It an save you time, money and heartache.
I have aa saying as an attorney: The best contract can’t make the other party honest or turn a scoundrel into an honorable man. But it can be used to flesh out issues, and to place the burden on a dishonest seller if he is trying to sell you a “bill of goods.”
Some contractual provisions that can be helpful in the new construction setting are:
- Obtaining representations and warranties in the contract from the seller.
- Obtaining all of the seller’s investigations and due diligence documents from his acquisition of the subject property and that he obtained throughout his ownership.
- Have the seller promise to pay the cost associated with extraordinary sub-surface conditions.
- Allow for generous due diligence investigations of the property in terms of time and property access during the sue diligence period.
After reading this blog entry, it would be an entirely rational reaction to never want to undertake the risks and challenges of new construction. Indeed, knowledgeable buyers see danger (read: costs) lurking behind every corner. But at the same time, a savvy buyer can — with relative safety — protect himself and seize the opportunity that new construction presents.