Beneath the Surface in Purchasing your Next Development Site

The Panoply of Considerations in Development Due Diligence

Purchasing a development site involves far more than reviewing the contract, title and planning certificate. Those documents tell a purchaser whether they can acquire the land. They say very little about whether the land can deliver the development.

That is the central question. Not ‘can we buy it?’ but ‘can this land support the intended use at the anticipated yield, on an acceptable cost base, within the required timeframe?’ A site can be perfectly clean on title and still be incapable of producing the lots, the margin or the delivery program the feasibility assumes. Some times there can be clues in the sales materials however other times only realised through experience and asking the right questions.

Two sites of similar size in the same growth corridor can have materially different development value. One may have a clear planning pathway, available sewer capacity, modest infrastructure obligations and few physical constraints. The other may be carved up by a waterway corridor and a drainage reserve, burdened by uncertain servicing and an external sewer requirement, encumbered by section 173 agreements, and exposed to development contributions and other charges that strip a large share of the gross area before a single lot is created.

None of that is often obvious from the contract materials. It emerges only from a coordinated approach during the due diligence to fully allocate the risks and benefits that may arise through the development process.

However, experienced developers know that the critical question is rarely whether land can be acquired; it is understanding what could happen next that is important. This is why the difference between acquiring land and successfully delivering a project is where development due diligence becomes critical.

Development Due Diligence Is More Than Reading a Contract

Greenfield due diligence is often misunderstood as a review of contracts, titles and planning controls.

While those matters are important, they represent only a small part of the overall assessment.

In reality, successful site acquisition requires consideration of a broad panoply of interconnected planning, legal, infrastructure, environmental, strategic and commercial issues.

No individual issue necessarily causes a project to experience difficulties. More commonly, it is the cumulative effect of multiple assumptions that ultimately determines whether a project remains commercially viable.

A site may have favourable planning characteristics but be constrained by infrastructure delivery. Another may have excellent servicing arrangements but be affected by drainage, conservation or acquisition requirements.

In many cases, the greatest risk is not the existence of a particular constraint, but the failure to identify how multiple constraints interact with each other and with the feasibility assumptions underpinning the acquisition.

Planning Risk Is Only the Starting Point

Many acquisitions begin with planning enquiries. Developers will naturally consider:

• the current zoning;
• applicable overlays;
• encumbrances on both title and from a development perspective;
• whether a Precinct Structure Plan applies;
• future strategic planning objectives;
• anticipated densities and net developable area; and
• potential development yield.

These investigations are important. However, planning controls rarely provide a complete answer.

Land within the Urban Growth Boundary does not necessarily mean development is imminent. A future PSP may support urban development but still be several years away from implementation.

An approved PSP may identify roads, schools, drainage reserves, waterways or public open space that significantly reduce the site’s net developable area.

The key issue is not simply whether development is supported. It is understanding what remains after all required deductions, reservations and infrastructure obligations are accounted for. Even If part of the land would be required for public uses, the question then needs to be assessed on compensation entitlements, if any, and known practices of the various authorities.

We often find that a legal position or right does not favour the need to complete development in a timely and efficient manner. This is why our strategic experience is important.

Infrastructure Frequently Determines Value

Many of the most significant risks encountered in greenfield projects arise not from planning controls but from infrastructure delivery. This can often lead to cost blowout, delays and disputes with various authorities.

Questions frequently arise regarding:

• sewer capacity;
• water servicing;
• drainage outfalls;
• electricity augmentation;
• transport infrastructure;
• intersection upgrades;
• regional infrastructure dependencies; and
• the timing of authority works.

A site capable of supporting substantial development on paper may require major external infrastructure before development can proceed.

It is also not uncommon for critical infrastructure to depend on works being undertaken by another landowner, authority or developer.

The existence of infrastructure near a site should never be assumed to mean that adequate capacity or connection rights exist. The distinction between proximity and capacity often has significant implications for cost and timing.

We often see significant complexities arising, for example, where Melbourne Water is failing to deliver scheme assets in a timely manner or seeking to excuse itself of such function, resulting in either delays or a developer requiring to deliver temporary assets pending the ultimate outcome which impacts developable area and increases the time upon which land is being held.

Land Constraints Often Sit Below the Surface

Title investigations remain fundamental to any acquisition. However, effective title review requires consideration of how legal constraints affect the intended development outcome.

Examples include:

• easements;
• adverse possession risk;
• existence of waterways and other encumbrances;
• restrictive covenants;
• section 173 agreements;
• access arrangements;
• public acquisition overlays;
• infrastructure corridors; and
• third-party rights.

The existence of a title issue is rarely the end of the analysis. The more important question is whether that issue materially impacts development yield, staging, servicing, construction or project timing.

Equally important is identifying whether a particular constraint can be managed through design, authority engagement, acquisition structure or contractual protections.

Environmental Constraints Can Significantly Affect Delivery

Greenfield land is rarely unconstrained land. Environmental and physical considerations frequently influence both yield and program.

These may include:

• native vegetation;
• cultural heritage requirements;
• contamination;
• flood and drainage constraints;
• biodiversity obligations;
• buffer requirements; and
• geotechnical considerations.

Importantly, many of these issues affect more than simply development layout. They can influence authority approvals, construction timing, infrastructure requirements and holding costs.

The consequences are often felt throughout the entire development lifecycle.

Commercial Risk Is Ultimately What Matters

Developers do not acquire planning schemes. They acquire projects.

Ultimately, development due diligence should reconcile all findings into a single commercial assessment. The objective is not simply identifying risk. It is understanding:

• whether the risk is material;
• whether it can be managed;
• what it will cost;
• how it affects timing; and
• whether it changes the acquisition strategy.

This often involves consideration of:

• development contributions;
• Growth Areas Infrastructure Contribution (GAIC) and Melbourne Strategic Assessment (MSA) strategies;
• infrastructure obligations including works / land in kind;
• appropriateness of infrastructure delivery sought by authorities
• staging requirements;
• holding costs;
• delivery dependencies; and
• contract structure.

In many cases, the due diligence process results in a revised acquisition strategy rather than a decision not to proceed. It may support a lower acquisition price, a longer settlement period, an option arrangement, a staged acquisition or additional contractual protections. That outcome is often where the greatest value is created.

The Real Value of Development Due Diligence

The purpose of development due diligence is not to identify every conceivable risk.

The purpose is to identify the issues that matter to project delivery and to understand their significance before capital is committed.

Experienced developers appreciate that the greatest value rarely comes from identifying the existence of a risk. The greatest value comes from understanding whether that risk can be managed, what it means for the project, and whether it should influence the price, structure or timing of the acquisition.

No single discipline provides that answer in isolation. It requires planning, legal, infrastructure, environmental and commercial considerations to be viewed together and assessed against the intended development outcome. Best Hooper’s strategic involvement and experience throughout Victoria’s greenfield sites helps understand risks together with delivery expectations.

That is ultimately what separates a site that can be acquired from a site that can be successfully delivered.

Our Thoughts

We often enjoy hearing about developments in Victoria historically being permitted through having a beer with a Council officer at the local pub; with a permit for a complex site being within a single page document. These days no longer exist, and it is time to stop reminiscing.

Authority requirements and planning permits are now complex instruments and should not be accepted at face value. The issue of a permit does not necessarily mean a development can be delivered efficiently. Risks often emerge during delivery, including when seeking authority approvals, negotiating section 173 agreements, interpreting permit conditions, or addressing overlooked conditions that may be unlawful or unnecessarily burdensome. These issues can require developers to deliver infrastructure at significant cost or assume other material delivery risks.

This is why we stress the requirement to get advice as soon as possible from and use the experience of your connections. This will be the best value-add for any project delivery.