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| Adolph D. Brown President |
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| Horace A. Jones, Jr., Esq. Vice President Business & Legal Affairs |
FREQUENTLY ASKED QUESTIONS
Heirs' Property Questions/Answers:
How can Gateway Development help me?
We are always interested in assisting families who own heirs' property, or property which once was heirs' property, in the development of their land. Current projects include the following:
- Development of a two condominium unit on Hilton Head Island, S.C.
- Development of condominium/townhouses/affordable houses in Charleston, S.C.
- Development of commercial property in Bluffton, S.C.
- Development of mixed-use on Pawley's Island
- Development of a residential housing project in Charlotte, N.C
- Development of Baptist Convention Land in Rock Hill, S.C. (over 100 homes)
- Development of an African-American Heritage Museum
What can I do with my development proceeds?
Each client represented by our company is provided with free estate plans, a simple will, a living will and a power of attorney. This is done to prevent the land from ever becoming heirs' property again. In addition, Gateway Development assists its clients in obtaining the services of a personal financial planner who will serve as an advisor to help acclimate them to the new wealth generated through land development. Moreover, there exists federal and state tax consequences from the net proceeds of a development project.
Gateway Development is capable of assisting our clients in minimizing these associated taxes and offers several options to our clients in this effort. For example, if a clients' family received a net profit of $4 million dollars from a development project, there is a potential federal tax liability of 15% as well as a state tax of 7% (in South Carolina). Through reinvesting the money, however; the family is able to reduce their federal taxes significantly. This is known as a Like-Kind Exchange and is a tool often helpful to our clients.
What is heirs property and how do I know if I have it?
Heirs' property is land that was initially purchased by one or more individuals whom have died without a will, and thus the land is subdivided among the surviving heirs. The property now belongs to these heirs, thus it is heirs' property .A family can determine if they share an interest in heirs' property fairly easily by asking themselves the following:
- Who initially purchased the land?
If the original purchaser was a late ancestor, chances are the land is heirs' property due to the fact that very few African-Americans had their estate probated prior to 1970.
- When did the purchaser die?
If the property owner died prior to 1970, again, it is likely that the land is heirs' property, but it is advisable to check with your county probate court.
- Was his or her estate probated within ten years of their death?
If no, then the land is considered heirs' property and the title must be cleared in a court of common pleas.
What are my options to clearing up heirs' property?
Once land is deemed heirs' property, from a legal standpoint, the land is said to have a "cloud" over it, and one of three actions must be brought in order to obtain a marketable title:
- Quiet Title Action - this action is brought to have the court establish who the
heirs at law to the original purchaser are. A family tree is vital to this action.
- Partition in Kind Action - This action is brought by one or more of the heirs who
are requesting that the court establish who the heirs are, and also subdivide the
property among these heirs. This is not the best solution when development is the
final product.
- Partition to Sale Action - This is an action brought by one or more heirs who seek
to have the court sell the land. This is an action typically brought by the developer
who will purchase one or more of the heirs' interest in the land, ultimately causing
the forced sale of the land, through which no one really profits except the developer.
What are some of the problems associated with sharing an interest in heirs' property?
There are numerous problems associated with sharing an interest in heirs' property, but the more common problems are:
- No bank will loan a mortgage on property with more than one owner.
- The property taxes may not get paid thus forcing the land to be sold for delinquent taxes
Developmental Questions/Answers:
What roles do a developer, builder, lender, liaison and realtor play in a development project?
Developer:
A developer's role in a development project is akin to the role of an executive producer in the film industry. The developer is the person pulling the strings of all the key members of the project. The developer as in the film industry obtains the necessary financing for the project and determines the market conditions for viability of the success of the development project. The developer addresses questions such as: will the envisioned project (i.e., condominium or townhouses) sell? Or how many people can we realistically expect to come see this movie? Or how much can we spend on the project? The developer's role is critical in any development project just as the executive producer in the firm industry. Though the executive producer is not tactually the person making the film, it is literally impossible to make a film without such a person. Similarly, the developer wears the same hat as the executive producer when it comes to the development project.
Building Contractor/General Contractor:
The developer has to identify the right building contractor or general contractor ("GC"), for the specific project he or she is developing. This is not as easy as it seems and is especially difficult in large cities or areas with high levels of ecological concerns. Thus, at times the developer's role is a balancing act in locating the best GC for a specific job. From knowledge we have acquired over the years, Gateway Development has learned that it is not always advisable to select the cheapest, the fastest or even the GC with the most experience. In specific types of construction projects, we find that it is the GC with the best track record with different municipalities, a good relationship with local unions, subcontractors and trade suppliers that are the best candidates for our projects.
More importantly, the selected GC must have a good political relationship in the local community where the project is being constructed. If a GC has this kind of support behind him or her, they will bring the project in on time and within estimated budget. Gateway Development first uses its political relationships to identify the best GC for the local area of where we are building and we then meet with the local planning board to ensure there are no issues with the GC under consideration. We also make sure that there exists a friendly relationship between the GC and the local planning board so that project progresses in a timely manner. It is also of some importance that the GC has previously worked in the local area so that he or she is familiar with all the trade subcontractors as we like to use local subcontractors as much as possible which is our way of giving back to the local community where the project is being constructed.
Lending Institution:
Lending institutions provide the necessary funds to finance a development project. Traditional lending institutions are banks such as NationsBank but may also be private investors. Regardless of the lending institution selected, the officer of the financing entity works directly with the developer. Therefore, the developer answers to the lending institution directly on every aspect of the development project. Any project delays, miscalculations of the estimated budget are the sole responsibility of the developer and in every case any mistakes reduces the developer's profit.
There are a host of procedures a developer employs to limit his liability. First, the developer and the lending institution are in a partnership with one another to ensure the success of the development project. Secondly, the most important thing to remember about the lender is that their primary interest is not the construction loan to construct the building, but rather the long-term loan payments. The lender is not interested in giving a developer $20,000,000 dollars to construct a building that will take only eighteen (18) months to complete because the interest payments are not that significant. Typically, the financing charges on a construction loan of this type will generate $2,000,000 dollars in interest charges for the lending institution. The lending institution is interested in the people that will purchase the individual units at 30% higher than the construction cost and hold a thirty-year note, which will generate $62,000,000 in interest payments for the lender.
Thus, it is incumbent upon the developer to negotiate and put in place vehicles to help a lender achieve their goal of obtaining every mortgage from any project they finance. For a developer to be successful, they must have several development projects ongoing simultaneously as it is this volume that is enticing to lenders and often times is the reason why it is so difficult for non-developers to obtain financing for their projects. Gateway Development continuously has several projects ongoing, which gives our bank several opportunities to participate, and potentially generate more mortgages. The same is true of insurers that underwrite large construction development projects; they generate their money from handling volume work.
Marketing:
Typically, the developer selects the marketing company and or realtor on a development project. All aspects of a development project are extremely important and if any one is taken lightly, it could cost you in the long run. In some areas it is almost impossible to finance a project without having a realtor provide a marketing report. A developer may elect to keep it all in-house for a greater return but this usually slows down the sales cycle and depending on the market conditions, may hurt the project. The developer negotiates fees and a marketing budget and most importantly sets a timetable for releasing a product and the pricing of the project. There are several things that help determine the pricing of a product: style, amenities, content size, and location and release date.
Example:
Assume a condominium building has been built and the released date is scheduled for May 1, 2005 in Palm Beach, Florida. Because, the Palm Beach vacation season begins in January and ends in April the developer will have a difficult time selling his units. At a cost to build of $100,000,000 at 8% interest, he could end up with an $8,000,000 mistake. This mistake could have been avoided by releasing the product just three (3) months earlier. In most cases the developer looks to have at least 50% of the building pre-sold before he/she breaks ground and sell the balance before project is completed. A good marketing team with sales incentives in place to strategically encourage these team members to pre-sell the building in a timely fashion without delay is critical with any development project.
Liaison/Managing Member/Building Consultant:
There is a direct link between the end user of the product and the developer commonly referred to as a liaison. The liaison's role is a broad in large projects. There is almost always someone in this position who works for the developer exclusively and in some cases the liaison will work for the end user in a similar capacity.
A building consultant may be hired to assist purchasers in development projects, whether the purchaser is interested in a condominium unit or a residential home. For example, a person enters into a contract to buy a home from a Gateway Development in New York City. Gateway Development has five different contractors building within the development, each with a different style home. The potential purchaser can hire a building consultant to monitor the construction of their homes. A building consultant may be needed because in most cases buyers work and can only visit the construction site after working hours. A building consultant can be placed under the developers or the GC bond and gain access to property depending on the type of project and provide status reports to the potential purchaser on the progress of their home.
Depending on the type of project that is being construction, the liaison could have great influence over the outcome of a project, or he or she could have little or no influence. Over the course of a project, the liaison's primary responsibility is to ensure that the agreed upon contract between the end user and the developer is followed. A liaison can also serve as witness to the compliance of an agreement as to the quality of workmanship. Retaining the services of a liaison on a development project can be of great value and a protection for both parties with regards to installation of specific components and workmanship and quality
Example:
Gateway Development is constructing a five-story, 100,000 sq. ft. building but has sold 5,000 sq. ft. to a dentist with special drainage requirements and specific wall placements for the insulation of x-ray retardant materials. For this office space a liaison could be crucial in ensuring the work in this specific area is performed to specifications of the federal and local governmental codes. Under this scenario the liaison will only have influence over the 5,000 sq. ft. and not the entire building and is paid by the dentist for his services.
How is a development project financed?
In all cases a business plan must be prepared which will include a plat site plan, architectural renderings of the buildings to be constructed, a marketing study, proof of site control, soil studies, and water table certificates and in some cases a preliminary review from City's Planning Board. Upon submission of this business plan to the lending institution, they will provide "soft cost funding ." Funds allocated for soft cost are used to:hire marketing personnel, pay for detailed architectural plans and all site preparation required to clear the work site and begin the project. This process should take six months, which also will include the developer and marketing team working on the pre-sell of 50% of the units. Once this occurs, the bank will begin to fund the balance of the project.
Who handles disbursements of funds?
The developer and the banker handle the disbursement of funds to finance a development project. All banks have a building inspector on staff that inspects every phase of the building. All Inspection Certificates must be signed off by the City's Inspectors before draw checks from the bank are made payable to the developer and the GC. In most cases three signatures are required on the draw checks: one from the bank representative, one from the developer and one from the GC. It is the developer's responsibility to ensure all the subcontractors working under the directions of the GC are paid.
Who is in charge during the development project?
The GC is in charge once the building is underway even though the developer is the owner of the project and all the weight will fall upon him or her in the event of a problem. The GC is on the front lines and answers to the inspectors, so he must have latitude to make decisions on a day-to-day basis.
Who is responsible for insuring a development project?
I am sure you have heard the saying you can never have enough insurance. This is especially true in the construction industry, which is the most dangerous job anyone can have. It is not uncommon for the bank to insure the project along with the developer and the GC. In fact, the bank will not fund the project without insurance bonds that can cost in the hundreds of thousands of dollars. The GC is also required to post a bond on development projects. Due to the high health risk involved on construction sites, the bond rules are strictly enforced and the fines are extremely harsh. This is another reason why the GC is in charge, as he or she is usually the one hit with the fines.
What are inherent risks in development project?
1. Potential worksite dangers:
During the construction phase, workers must be vigilant at all times so as to avoid any potential accidents. To date, Gateway Development has had no workers on our projects seriously injured. The primary reason is that here at our company, it is mandatory that all our workers and subcontractors receive regularly scheduled safety meeting and daily briefings before work commences whether they like it or not.
2.Under-pricing a development project:
There is nothing worse than having to go back to the bank and ask for more money as a result of under pricing a development project. Requesting more funds from the bank will force the interest rate previously agreed upon to change and the bank will likely loose faith in the developer's ability complete the project. It is better to slightly overprice a project as the bank will only charge you for the funds used.
3. Changes in market conditions:
A developer builds condominium units at a list price of $500,000 per unit. However, due to a downward turn in the economy he is currently unable to sell these units at this price. Fifteen years ago it took longer for a market to change; typically, a builder would first see a cooling off period or a reduction in sales, which normally would provide a builder with time to adjust.
However, in today's market, disasters can strike at a moments notice and jeopardize a project. A possible solution is for the developers to obtain insurance, which may ensure his/her project against a downward turn in the market in the event of a natural disaster or things beyond ones control.
Due to the volatile business environment here at Gateway Development, we prefer to use American General Insurance ("AIG") on larger development projects. The other solution is to pre-sell more than the required 50% of the units before construction begins which effectively spreads the risk over several different investors and operates to protect the project. At Gateway Development we like to employ both strategies simultaneously as a sound business practice and because our bankers love this idea.
What phases are involved in development projects?
There are nine key phases involved in a development project:
1. Developer obtaining site control
2. Preliminary planning/ Community review boards
3. Financing contingencies
4. Architectural plans prepared/ permits obtained
5. Site Prep/Insurance
6. Marketing Materials / Commencement of Sales Cycle
7. Grounding Breaking of project
8.Building of site / Certificate of Occupancy
9. Sell out of units.
What is a certificate of occupancy?
A Certificate of Occupancy ("CO") is given to the GC by the Building Codes Department which states the building has been built to code and is safe and may be turned over to the property owners for occupancy. At this point the job is done and each individual property owner will take legal possession of his or her unit, receive their individual tax bill and deed. At this point, the property is under the care and insurance of the individual owners; however, the developer and GC often remain responsible for the structure (i.e., condominium building) and quality of the work. In some states this insurance can remain in place for up to fourteen years depending upon the building constructed.
How long does a development project typically take?
In most situations, construction of a single-family house takes approximately three to six months. Construction of a multi-family building of four units usually takes twelve months from beginning to end. A larger building such as a condominium can take up to twenty-four months from start to the issuance of the CO.
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