Advice for negotiating land sale

[Dot57]

This might be a stretch for this forum, but I've concluded there are many experienced and wise people on this forum, so hoping I can get some good discussion on this one...
I am the trustee of our family estate, which includes land. We have been under contract with a developer for nearly 5 months to sell the land for $10 million. We have just learned that the buyer will be required by the city to build a public access road through the property, which is adding several millions to their cost. The buyer is asking us to extend our due diligence period for another 9 months while they sort this out. Our attorney feels that we should agree to the extension but that the buyer should pay us something for this and is suggesting they move the $200K in escrow money to our bank account, which will be applied toward the purchase price at closing. My thought is that we are losing a huge amount of opportunity cost by not having the money to invest for 9 -12 months. With the uncertainty in the economy, I am trying to assess how to share more equally in the risk.

 

[COcheesehead]

Ask for an additional $337,500 which is about equal to the risk free rate of return on $10m for 9 months.

 

[MarieIG]

My thoughts, have the buyer pay your property taxes and other costs involved in maintaining the property until the sale, in exchange for pushing back the purchase date. You keep those fees if they cancel the purchase or even if the sale goes through. It is costing you more to hold the property isn't it?

 

[MC Rider]

Add that fee to the $10Mil.

 

[Spock]

What to agree to depends on how fast could you find another buyer.
9 months seems like a long extension for due diligence and "sorting out" having to add a road is beyond due diligence. More like negotiating with the city while you hold the asset. They need to put some non-refundable skin in the game to be put on hold for 9 months.

 

[socca]

Conceptually, extending the due diligence period means that the old purchase contract has been terminated and a new contract has been put in place. You don't have an obligation to sign a new contract with the current buyer. If you put the property back on the market what's the probability that a less-problematic buyer will appear?

Disclaimer: ask me this question in a few years and I might know more. I'm hoping to orchestrate the sale of a substantial amount of prime American flyover state farmland in the coming years. Maybe I can convince Bill Gates to cough up a few $billion$ for our land.

 

[njhowie]

What does your sales contract with the developer say? How long of a period do they get for due diligence if you don't agree to extend for another 9 months?

Do they have the option to walk away at this stage of the game because of the city requirement, or are they required to go to closing regardless? I would guess that if they are still within the original due diligence period, this city requirement is a material issue that would likely allow them to walk away.

Take the advice or your attorney. You have no opportunity cost at this time, unless the developer is required to go to closing and pay now, or you have another buyer ready to sign a contract and keeping the land off the market is preventing you from taking an alternate offer right now.

 

[Echard]

All good advice. Definitely ask for something else. Also just a thought. There is a decent chance land prices will decline over the next 12-18 months because commercial real estate still hasn’t corrected enough from the interest rate increases. There is another shoes to drop. Is there a scenario where you can break that 9 months into different milestones and still market the land in parallel?

 

[Ronstar]

The developer is trying to buy time. Sorting out the road doesn't take 9 months - 9 days at the most. I wouldn't agree to the extension.

 

[COcheesehead]

The developer is trying to buy time. Sorting out the road doesn't take 9 months - 9 days at the most. I wouldn't agree to the extension.

There is a process of public input, notification, etc. It could be 9 months, easily. A parcel near us went through all of this. It’s been a year plus.

 

[pb4uski]

What happens if you refuse the buyer's request? The buyer is still on the hook to buy and you can insist on specific performance I would think.

 

[Aerides]

The developer is trying to buy time. Sorting out the road doesn't take 9 months - 9 days at the most. I wouldn't agree to the extension.

If the developer has any experience in the area they might well have anticipated this, certainly before now. I wouldn't agree to anything that I wasn't prepared to see extended (if they win this one they will ask for another). If you stay with them get some real concessions and skin.

How hard was it to get the original sale? Were you competitive, was there other interest?

 

[OldShooter]

Negotiation is all about people, emotions, and egos. Not numbers. Ideally through your lawyer you have a good relationship with the buyer. If not, the lawyer should work on that.

IMO it is dangerous to sit at home hypothesizing terms. Use your understanding of the buyer to develop a strategy. I might also throw an "anchor" number out, higher than he will be comfortable paying, then ask him for an offer. Use that response to plan your next move. Go slow. Patience always wins. Along that line, try to determine what deadlines he may have and use them where possible as pressure.

IF you go in throwing around numbers before you have studied and understood the negotiation landscape you risk (a) leaving money on the table and/or (b) the negotiation turning adversarial with an unpredictable outcome.

 

[ivinsfan]

I hope I'm wrong but with rising interest rates, bank problems, etc..this is the first step of your buyer looking for an exit point

 

[Ronstar]

There is a process of public input, notification, etc. It could be 9 months, easily. A parcel near us went through all of this. It’s been a year plus.

Possibly, but every one of the hundreds of roads and subdivisions I dealt with were such that the developer was able to determine approximate development costs in days, based on the improvements that have been discussed with the city.

In the OP's case, it looks like the developer was told that he needs to put in the road. I understand that it takes several months to get design and plan approvals, but the developer can proceed with the land sale without these approvals. Majority of the projects I worked on had the land owned by the developer long before the approval process was complete.

It's just that he doesn't want to take any risk, and he hopes that the seller will extend the due diligence period, giving him an extended opportunity to back out of the land sale if anything arises that he doesnt like.

All of this said, if OP wants to go further with this developer, I would certainly want significant non-refundable $ from developer in exchange for an extended due diligence period. But make the non-refundable $ request enough that convinces the developer to close within the current schedule.

 

[COcheesehead]

Possibly, but every one of the hundreds of roads and subdivisions I dealt with were such that the developer was able to determine approximate development costs in days, based on the improvements that have been discussed with the city.

In the OP's case, it looks like the developer was told that he needs to put in the road. I understand that it takes several months to get design and plan approvals, but the developer can proceed with the land sale without these approvals. Majority of the projects I worked on had the land owned by the developer long before the approval process was complete.

It's just that he doesn't want to take any risk, and he hopes that the seller will extend the due diligence period, giving him an extended opportunity to back out of the land sale if anything arrises that he doesnt like

I don’t think anything can be sold until the city/county approves. A subdivided property needs zone approval prior to sale.

 

[Ronstar]

I don’t think anything can be sold until the city/county approves.

Happens all the time - at least in Illinois. Lands owner sells raw land to developer. Developer prepares plans, gets approvals, puts in public utilities , then developer sells lots.

Raw land can be sold at any time without city/ county approvals.

 

[ivinsfan]

I don’t think anything can be sold until the city/county approves.

Color me cynical but I don't believe a developer bids 10 million bucks for a project without knowing what is needed for infrastructure....of them to act like this is a surprise is disingenuous

 

[COcheesehead]

Happens all the time - at least in Illinois. Lands owner sells raw land to developer. Developer prepares plans, gets approvals, puts in public utilities , then developer sells lots.

Raw land can be sold at any time without city/ county approvals.

But can’t be subdivided without process. Watched it happen many times around us.

 

[COcheesehead]

Color me cynical but I don't believe a developer bids 10 million bucks for a project without knowing what is needed for infrastructure....of them to act like this is a surprise is disingenuous

Just watched the process next to us.

 

[Ronstar]

Color me cynical but I don't believe a developer bids 10 million bucks for a project without knowing what is needed for infrastructure....of them to act like this is a surprise is disingenuous

Definitely , but infrastructure needs are hammered out during preliminary meetings with the city - at least in Illinois. It sounds like this has already been done in OP's case. Engineers come up with preliminary cost estimate of public improvements based on the city's requirements. These estimates are generally within 10% of final bids.

The developer would know if the project makes financial sense, if he gets preliminary cost estimates of everything that is required to build what he wants to build. This is part of what due diligence is. Find out what improvements are needed and get estimated costs.

We used to do feasibility studies on proposed developments in the due diligence period. Preliminary improvement cost estimates, and development constraints - flood plain, zoning, utility issues, etc. If the developer didn't like the numbers or the constraints, they backed out. Otherwise they bought the property and continued on with the development.

 

[ivinsfan]

Just watched the process next to us.

However the fact the developer has shared "this will cost them several million extra dollars"..is a big red flag..


Any developer that would do a 10 million $ raw land purchase development is going have experience with what they need to do to go forward. They are usually also really good buddies with the zoning and planning officials! In a rapidly developing area such as yours, granted the rules might change. At any rate I wish the OP good luck.

 

[Dot57]

Thank you all for the detailed replies! You guys are the best! I neglected to mention in my original post that the buyer is a very experienced developer, with many large scale projects under their belt. They have a great reputation and deep pockets. They offered to buy our land before it was even listed for sale. The price far exceeds recent prices in the area. We are hoping the project will go through but it appears the city is taking advantage of the buyer by requiring them to build this public road ("for future growth, 15 years down the road"). Now the builder is looking into creating an SID to handle these costs (6-7 M).
The city is balking at the idea of an SID, even though they are very common in the area. I wish I had some tips on how to fight city hall. (The 'city' has a population of less than 2,000 people)!