One of the biggest challenges facing economic developers and real estate developers in general is assembling a collection of small parcels of land for the purpose of offering a large site for development. One of the more common ways to accomplish that is the use of options on real estate.
Options are becoming more important as sites needed for projects are becoming larger. The term “megasite” is being heard more and more in economic development circles. For a community to attract a large project such as a manufacturing or distribution center it must be able to offer or have available a parcel of real estate that meets the needs of the project. It is not unusual, for example, for an automotive assembly operation to require hundreds of acres available for development. There is even such a thing as “certified megasites.” McCallum Sweeney Consulting, one of the nation’s premier site selection companies, has a service whereby it certifies megasites that meet certain conditions. Generally, such sites will contain a minimum of 1,000 acres, completed environmental and geotechnical testing; a plentiful labor supply in the area; and an acceptable infrastructure development plan. These megasites will also be in good proximity to interstate highways, railways, and suppliers.
Assembling such a site can be a daunting task for even the most seasoned economic developer. Doing so will involve the outright purchase or using options to gain control of the properties to be ready when the project might materialize. Thus, understanding options is critical to the work of economic developers.
An option on real estate is a contract to purchase the right for a certain time to purchase property at a stated price. Note that an option is the right, but not the obligation, to buy. For example, a party may pay an owner $1,000 for the right to purchase the owner’s property for $250,000 for a period of 60 days.
Options offer the opportunity to hold, or control, a parcel of real estate for a designated period of time. For the economic developer, options are a way to show a prospect that the land for the project is available. A danger for the economic developer is that the option may expire before the project has been landed, so to speak, but that the owner has learned of the project and will increase the price of a new option, or not even consider another option in the hopes of making more money off the sale of the land. Many an economic development entity has paid top dollar for real estate after word of the project leaked out and the owner raised the price to the point of coercion. On the other hand, many an economic development entity has paid for options only to have them expire with no resulting project for the land.
Options are the right to purchase property, not an obligation. When the option expires, the purchaser does not receive a refund because he purchased a right, not a contingency. That leads to another way to control the real estate — the use of a purchase contract with a contingency clause. For example, instead of an option, the purchaser makes an offer to purchase the property for a certain price contingent on landing a certain project for the property. If the project effort is not successful then the contract expires, or is declared void, because the contingency is not met. The purchaser is not required to purchase the property and will receive a refund of any earnest money deposited.
Speaking of earnest money, it is evidence of a purchaser’s good faith intent to go through with the transaction. It is not the same as an option payment. Also, an option is not a down payment although it is common for the option payment to be applied to the sales price in the event that the property is purchased.
Options also offer advantages and disadvantages for the owner of the property. Up to now it sounds like only the person buying the option has all the cards. Are there advantages for the owner? The first advantage is that the owner receives something of value in return for giving an option to another person even if the property is not purchased. An option may also aid in the eventual marketing and sale of the property by illustrating that there is interest in the property. The most obvious disadvantage is that the property is off the market. If another buyer comes along who is will to pay more, the option will need to be dealt with.
While the above items are important to a successful development project, even more important for the developer is the assembling of the necessary projects to gain control of a megasite or even a smaller site. That can be a daunting task when several parcels are needed to create one large site. Issues of all types may arise. Owners may contact each other and cause problems for the developer. Even when options are obtained, there may other issues with the real estate, such as liens, environmental problems, etc. Titles searches may reveal ownership problems. Even with all of the possible issues, options are a useful tool for economic developers and real estate developers to create projects that improve a community.
This column merely highlighted some of the aspects of real estate options. It is not intended to offer legal advice. An attorney familiar with real estate options should be consulted before entering into any real estate option contract.
Phil Hardwick is coordinator of capacity development at the John C. Stennis Institute of Government. Pease contact Hardwick at email@example.com.