Rezoning, Developing & Sub-dividing

Zoning is the process of allocating land uses in an orderly and structured manner in order to facilitate the efficient holistic development of communities based on the dominant preferences, needs and land use options of a particular area. The current or potential zone of land is directly related to the value of that land.

Land uses can be broken down into many categories. For our purposes, we will look at the two major categories: residential and commercial.

Residential Zones

Residential zoning permits the construction of buildings on a site at a pre-defined ratio or density and for the primary purpose of housing. This includes a range of options from rural housing on large acreage lots to multi-high-rise development. The value of a particular zoning is defined by the number of potential dwellings that can be created on the same sized parcel of land. For example, in a rural zoning, only one home per hectare of land may be allowed: in a high-rise unit site, the same hectare (if such a thing could be found near a CBD) could carry up to 500 dwellings.

The sizes and definitions of zonings vary from council to council, but examples of residential zonings are:

• Rural Minimum allotment size 1 hectare

• Semi-rural Minimum allotment size 0.5–1 hectare

• Residential A (detached) Minimum allotment size 450–1,000 m2

• Duplex/triplex Minimum allotment size 250 m2 (2–3 homes on a Residential A site)

• Townhouses Minimum allotment size 150m2. Dwelling density based on the gross floor area (GFA) of the dwelling. A zone may, for example, allow for a GFA of 40 per cent of the site area.

• Unit (3-storey walk-up) Based on GFA Multi-unit Higher density developments from 1–5 storeys, usually on larger land parcels. GFA still considered.

• High-rise multi-unit A plot ratio calculation is used to determine the acceptable GFA as a multiple of the physical land area. A major CBD, for example, may have a plot ratio of 10: 1: allowing 10,000 m2 GFA of dwellings on a 1,000 m2 site.

Commercial Zones

The term ‘commercial’ casts a very wide net, but most commercial property can be broken down into the following sub-categories:

Industrial – waterfront industrial and high-tech industrial or traditional industrial land

Retail – regional shopping centres, district shopping centres, strip shopping, local shopping and retail showroom outlets

Office – high-rise, low-rise, mid-rise, strip and call centre

Mixed-use development – a combination of office and retail

Warehouse – retail bulky goods, storage and distribution, often within industrial or mixed use zones.

Unlike residential zones, where a property can ‘move’ from one zoning (e.g. rural) to another (e.g. Residential A), it’s rare for commercial zonings to change from one use (e.g. industrial) to another (e.g. retail). However, this does occur, usually when state governments or local planning authorities make major amendments to their strategic plan for an area.

Rezoning or ‘up-zoning’

So how do you add value to your property asset through its zoning? Here are some examples.

From rural to residential

Rural zoning has restrictions on the permitted size of subdivided lots: these vary from council to council, but the minimum is 4,000 m2 (1 acre). If you purchase a rural lot with potential for up-zoning to residential, you can get approval to subdivide into smaller lots and on-sell them separately.

Say you pay $400,000 for an eight-hectare (20-acre) rural site. You will lose 15 per cent of this area putting in access roads and services, leaving close to 7 hectares (17 acres). Under rural zoning, you could subdivide into 17 allotments of 4,000 m2 (1 acre), retailing at $100,000 each. If you can up-zone to residential, with its greater density of 4–5 lots per 4,000 m2, you could subdivide into 65– 85 lots, retailing at $60,000 each!

Yes, the maths really is this good! It may seem strange that you can pay $400,000 for eight hectares and get $100,000 for 4,000 m2 but this reflects another source of hidden profit or intrinsic value. People actually prefer and will pay proportionally more for smaller, more manageable lots with services than for large, unserviced blocks of land.

From Residential A to multi-unit

The same kind of equation applies. Say you have a 1,000 m2 site (a typical house lot), for which you pay $200,000 (land value). Under Residential A zoning, you might have one dwelling on it, but if you can up-zone and get approval for 6 units, the land value could go up to $300,000 or more.

If you go to high-rise unit zoning, that $200,000 block of land, with approval for 80–100 units, could be valued in the millions.

From rural/residential to commercial

I’ve bought rural/residential land for $270,000, up-zoned to commercial and on-sold the land (to business buyers like McDonald's) for $670,000.

If you’re looking to deal in commercial land, the following are useful tips:

• Look for attributes attractive to businesses: main road access and exit; exposure to passers-by; population density; adjoining uses (for example, fast food outlets like to cluster together); and competition (other businesses may prefer less competition in the immediate area).

• You don’t need to have a particular buyer in mind as part of your exit strategy, as long as

you have in mind a category of business or purpose for the property – be it fast food, freestanding retail outlets (which don’t require a mall environment), auto stores and so on.

The zoning value scale

As a general guide, the value of land goes up with up-zoning approximately as follows.

Residential

Value based on dollar per hectare

• Semi-rural = rural value x 2

• Residential A detached = rural value x 10

• Duplex/triplex = rural value x 14

• Townhouse = rural value x 18

• Unit (3-storey walk-up) = rural value x 22

• Unit (multi) = rural value x 26

• Unit (high-rise) = rural value x 30+

Commercial

Value based on dollar per square metre rent achievable

• Warehouse = industrial value x 2

• Office = industrial value x 3–5

• Retail = industrial value x 3–8

• Mixed use = industrial value x 4–10

How to set about rezoning

Step 1 - Visit the local council and look at the zoning maps (maps of the council area with the various zones colour-coded) and the strategic plan (a definition of where the council wants to get to, in terms of growth and planning, in 5–10 years. This may, for example, show rural zones as ‘future urban’). 

You want to find out:

• The current zoning of the property you are interested in

• Its potential to up-zone as expressed in the strategic plan or if it borders with other zones. Council has discretion as to rezoning at the borderline.

Step 2

Enroll a town planner. Ask the council town planner to refer you to a town planner who is active in rezoning in the area. You can handle a rezoning yourself, but a town planner will know the councillors and council officers, and the area.

Step 3

Get preliminary advice from your town planner about the chances of success. Have a critical path analysis done, setting out the anticipated cost and time to secure the rezoning. On the basis of this analysis, make the decision whether or not you will contract on the property you are interested in (subject to rezoning approval).

Step 4

Make the rezoning application. Your town planner will prepare a formal application. Various councils will require you to advertise the application so that the property’s neighbors and the general public can have their say – and lodge any objections they may have to your plans. You may want to be a little more proactive and discuss the proposal with the neighbors yourself. If you’ve bought a property which is an eye-sore or obviously under-utilized, they may be happy that you are going to be bringing the property up to scratch as it should improve their own property values. The fact is there are interest groups and individuals in any community who will object to anything but the council will generally take most account of the views of the immediate neighbors (unless there is a significant objection on town planning grounds) so get them on a side if you can. It also helps if you (or your consultants) have talked any potential objections over with the council officers prior to advertising (and before they have to start fielding calls.)

Step 5

Prepare and submit any surveys and reports requested by council. Councils can go overboard with this sort of stuff – environment reports, traffic reports, noise reports, engineering reports, external reports from Main Roads and quite often proof that the land is not contaminated in any way or on a contamination register. Essentially, councils want to cover themselves: you’ll just have to get used to it. But the reports don’t take long to prepare and often aren’t that expensive. A good town planner or engineer can arrange them for you.

Step 6

The council may set prior conditions for approval. For example, you may be required to agree to develop the property within X years, or to pay various charges e.g. for head works (connection to council services) and so on. Alternatively, council may simply approve the application subject to the conditions set out. You can appeal the conditions through the Planning and Environment Court or the Land Court. This may be worth doing but get a specialist town planning lawyer.

Step 7

The application goes to the relevant state minister of local government or planning to be gazetted: the site is then rezoned. (And the council zoning maps are re-coloured.) You can then get on with your strategy to develop or on-sell the property! The whole rezoning process will take a minimum of six months. Remember to allow for this when negotiating terms with the vendor.

Developing a property

Essentially, ‘development’ is the process where you bring land to its highest and best use. It is defined in planning legislation (which varies from state to state) as the:

• Construction or exterior alteration or exterior decoration of a building

• Demolition or removal of a building or works

• Construction or carrying out of works

• Subdivision or consolidation of land, including buildings or airspace

• Placing or relocation of building or works on land

• Construction or putting up for display of signs or hoardings.

Planning legislation sets out definitions and provisions for various forms of permits, approvals, appeals and so on: leave the detail to your consultants. Basically, the development process will be as follows:

• Rezone (as outlined) if necessary.

• Get development approval or planning permit. Some councils will deal with this at the same time as the rezoning application while others require rezoning first. You will need to get a specific plan for the usage of the site approved by council. Your surveyor, engineer and architect (if required) will draw up the plans, addressing specific issues about which council will need to be satisfied (such as drainage, access and environmental concerns). 

If you are constructing or redesigning you may also need a building approval. Council will need to approve working drawings (again prepared by your architect, engineer and surveyor). You may also need a subdivision/strata approval if you are going to parcel up the development and sell individual lots, strata title and so on.

• The council may require you to advertise the application (usually for a minimum 14 day period) so that objections can be lodged. (See rezoning above regarding the point about discussing the application in advance with council officers and neighbours applies.)

The total application process will take a minimum of 3–4 months so remember to factor this into your negotiation of terms with the vendor.

The developer’s A Team

If you’re undertaking development, you need to have your external A Team of consultants firmly in place. These are the people who will deal with the council; provide feasibility studies and budgets; carry out works if necessary; and perhaps even market and on-sell for you. They are essential in helping you to realise the potential of your property as soon as possible.

• A surveyor and town planner are very important. While these are two separate disciplines, there are individuals who are qualified to do both. The surveyor will do the planning work on the site, including identifying boundaries and gradients, locating current or planned buildings and services and so on. The town planner will use the surveying information to submit applications to council.

• A civil engineer specialises in civil works including roads and services (such as sewage, water, drainage, electricity and so on). They will be experienced in dealing with councils, providing required reports (traffic reports, noise attention and so on), calculating development costs, preparing feasibility studies, planning civil works and preparing tenders on your behalf to get the works done.

• An architect may be required if you are intending to build or change existing buildings. I generally choose and use architects for two distinct purposes. One: a conceptual architect who can develop a vision for a site, draw up a conceptual plan and help to sell the project to council (and potential buyers) with flair. Two: a technical architect who can do the nuts and bolts and working drawings. (It’s rare to find an architect who is good at both.)

Construction

Construction is probably the most litigious industry you will ever encounter. The big construction companies (and even some of the small ones) are renowned for pricing jobs to win the tender and then making their profits by haggling over the fine print of their (several hundred page long) contract documents. If you need to engage in construction to bring your project to fruition, I recommend you come to a design/construct agreement with a contractor at a ceiling price. This prevents cost blow-outs and the contractor takes the responsibility for the whole process of design, approvals, budgeting, liaising with the engineers and architects and so on. If you go this way, you’ll need to have the contractor in place at the building approval stage.

Frankly, if you don’t have to engage in construction works, don’t! You can make more money with less hassle up-zoning and selling on land parcels to building contractors or other developers. A small unit block job (under $500,000 and taking 6 months) should be okay but the multimillion-dollar, 1–2 year jobs are well, let’s call them ‘testing.’

Subdivision

Subdivision is a comparatively quick and easy way to realise profit on a property. The applications are not as onerous as rezoning, because subdivision requirements and restrictions are generally well defined in council by-laws. Provisions commonly relate to the:

• Permitted size of the subdivided lot

• Provision of access to roads and services

• Contours of the allotment (falls and rises) for the feasibility of dwellings.

The concept of subdivision is simple. At its most basic, you identify an allotment of a size that will allow further occupancy (typically around 800–1,000 m2) and you arrange to subdivide it into two or three lots that can be on-sold separately.

Corner allotments are particularly attractive, because they have road access on two sides: this allows dual occupants of the site ready access (although access to a rear allotment can be arranged by other means, through shared easement access routes and so on).

Step 1 - When you’re checking the council zoning maps, find out the minimum allotment size, access and contour requirements for a given zoning.

Step 2 - Speak to the council chief town planner about the specific allotment you have in mind. They will generally advise you about the relevant possibilities and restrictions.

Step 3 - Get the block under contract but subject to approval. Allow 60–90 days for the approval process.

Step 4 - Get your surveyor to draw up a subdivision plan and submit it to council for approval.

Step 5 - Get your engineer to draw up an engineering plan showing connection of the new lots to council services (sewerage, electricity, water, drainage, roads) and submit it to council for approval.

Step 6 - Carry out the necessary works. The engineer will engage a civil contractor and will protect your interests as works proceed. The engineer and surveyor will then certify the works completed in accordance with the approved plans.

Step 7 - Council will seal the ‘linen plan’ (or amended title plan) which is sent to the state titles office for registration as a new allotment. You can then mobilise your strategies for development or sales of the subdivided lots!

Example

Quick profit from a back-yard subdivision

You purchase a property of 1,000 m2, a corner block with the house built to the front of the allotment. The property costs you $300,000, of which the land content accounts for $200,000. You cut off the back yard, providing a vacant lot of 500m2. The surveying, applications, consultants’ fees and works (connecting the new lot to services and so on) costs you $30,000.

You can sell the new vacant allotment for $180,000. And your original house, on its own 500m2 site is still worth $250,000! Again, appreciate the wonder of the maths. The sum of the parts really is bigger than the original whole! Why? Simply because people prefer (and will pay a premium for) smaller, more manageable, serviced lots. So why don’t they just buy a larger lot and make a profit by subdividing themselves? Because they don’t know about intrinsic value or hidden profit! You do: that’s how you get ahead of the game.

Explanatory notes

Gross realization is your projected end sale price, with the building at its highest and best use.

Marketing costs include agents’ fees (3–4 percent) and advertising (2 percent) and about 6 percent of sale price.

GST (if you are registered) will be one eleventh of the sale price less the input credit for costs. Estimate it at 6 percent of the sale price.

Stamp duty and land tax vary from state to state.

Legal fees may also vary. I suggest you get a quote up-front from a lawyer, to include disbursements (search fees, registration fees and so on).

Financing costs are the costs of arranging finance and holding the land such as establishment fees and stamp duty, finance brokerage fees/commission, and interest payments throughout the intended life of the loan.

A surveyor will identify the lot boundaries, carry out surveying and lodge titles. They will generally quote on a per allotment basis, plus extras for time spent with council.

A town planner will arrange reports to comply with a council’s requirements. They will generally quote on the basis of time taken.

Civil engineers calculate the costs of external services, lodge plans and comply with Council requirements for connection to services. Structural engineers carry out and certify construction requirements in relation to the foundations, footings and general structure of buildings. Hydraulic engineers may work with the structural engineer on water and sewerage connections. Electrical engineers will do the detailed electrical layouts. Engineers generally quote on a percentage of construction costs.

Soil engineers test the soil to see what kind of footing design you need (different soil types require different foundations). Get a quote for a set fee.

Noise attention council may require a report from the engineer which is quoted on a fee basis.

Architect some councils require plans of reconfigurations, renovations and constructions to be drawn and certified by an architect or design draftsperson which is quoted on a fee basis (1–3 per cent construction cost).

Project management/supervision: get a quote (up to 8–10 percent of the total construction price) to protect your interests and coordinate building works.

Council applications, fees and permits: apply to the council for a schedule of costs.

External civil works include external road access, external works to connect services and so on. Internal civil works include driveways and parking, on-site drainage and so on. Get a quote from the civil engineer (or other contractors, such as landscaper, if appropriate).

Building costs should be quoted on by the structural engineer.

Legal costs on completion of the project include the registration of subdivided titles, preparation of contracts for sale and so on.

Contingency things happen so allow a contingency fund of 5 percent of the total construction price.

>>> Coming Next: Exit Strategy

Please note: This is an extract from the Success From Scratch – it may not contain the exercises from the full version of the book/audio set, for full version please contact us or follow our blog for more.

Thank you,
The team@Custodian