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Legal Challenges for the Real Estate Developer Part I

by SST Tax Supervisor, Velma Garcia

Real estate developers, in a nutshell, purchase or develop land owned by others to create or renovate the property. Developers put their own capital at risk and/or are responsible for raising the equity and financing required. In today’s complex and modern society, real estate development requires knowledge of financing, legal restraints, business/market risks, and project supervision.

Sometimes real estate development is undertaken as a public works project, in which case it is not viewed as an investment in the traditional sense. The government often engages in public works development to enrich communities and may reach out to private developers to help achieve that goal. A more recent popular trend shows public and private partnerships whereby the government entity invests a portion of assets towards the property and the developer is responsible for raising the remaining capital to complete the project.

For private developers, real estate development is a long-term, entrepreneurial undertaking. The developer must believe that the newly designed and designated real estate will have sufficient long-term value (and meet sufficient demand) to compensate for the time, labor and other resources devoted to the project.

There are various basic steps that a real estate developer must see through in order to bring a project to full fruition and each phase of that process presents its own set of legal issues and risks that often overlap. In this two part series of blogs we will take a deeper look into each step in the real estate development process. Today’s blog will focus on the Land Acquisition and Design/Planning phases of developing property.

Land Acquisition

Many projects may require large tracts of land from different sources and assemblages adding another risk of dealing with multiple sellers for one project and having to deal with “holdouts” (Sellers who will not sell) and planning to design around “holdouts”. Tax implications must also be considered here.

Then there are the issues related to title encumbrances and easements which may have to be abandoned or moved. Good title review becomes important later in the financing step.

There is also the risk of land exploitation mainly related to environmental issues.

Design/Planning

The design phase relies greatly on the developer’s choice and rapport with architects and construction companies that they have chosen to work with.

There needs to be a clear understanding of land uses and locations within the project as to parcel, lot lines, and even finer details such as parking rights, allocation, and ownership.

Attorneys are often involved in every phase of planning through designing of the project as this is when contracts and legal agreements arise. The legal risk here relates to liability concerns and drawing up contracts correctly.

 

Be sure to check in for our next blog in this series regarding the final five phases of real estate development; Zoning/Entitlement, Construction, Operations, Management & Maintenance, and Financing.

For more resources regarding this topic and other tax related questions feel free to give us a call and we will connect you with a member of our team.