As appeared in…

DECEMBER 2-15, 2020 Law & Accounting An overview of due diligence for land development

ot too many months ago, of the physical the surface may be developed in Nwe were in the midst of the aspects of the the near term. “Great Shutdown.” On the indus- property. One The irony here is that in construction The obligation to deliver such trial and residential real estate of the most notification is triggered by an development front, it was so quiet consequential parlance, the phrase “dirt cheap” doesn’t “application for development” you could hear crickets chirping studies will be make sense. If dirt goes for $4 per cubic (C.R.S. § 24-65.5-102(2)), which outside. I went in one day to my a soils report. yard, for example, and hundreds of is broadly defined as an “initial office (narrowly avoiding a tick- The condition application” for a variety of enti- et, zooming through the “speed of the soil may thousands of cubic yards are needed, tlements or for zoning or rezon- trap” that is now Interstate 25 at Jed Sonnenshein have impact- there’s nothing cheap about it! ing. Once the notifications go out, 8 a.m. on a weekday morning) Partner, Fox ful financial the statute requires mineral estate only to see a couple of lonesome Rothschild LLP, implications owners to respond if they have jsonnenshein@ tumbleweeds rolling down the foxrothschild.com on a project. If any objection to the proposed sur- hall. Around this time, I wrote the property are triggered upon, say, pulling the mental authorities levying taxes face estate development and, if so, an article in this same publica- has expansive 100th permit in a residential sub- and assessments (some of which to confer with the surface estate tion discussing how the vesting soils (which expand and contract division. If there is no annexation may be able to issue bonds and owners to reconcile both parties’ (or preserving) of entitlements depending on moisture content), agreement of record and the prop- impose mill levies on the property respective concerns regarding sur- and zoning approvals operates in a common Colorado condition, erty has not been annexed into for the bonds’ debt service). The face access for oil and gas oper- Colorado. I had thought this to the soils engineer may recom- any municipality, this is essential tax certificate also will identify the ations and surface development be a timely topic as everything mend sub-excavating the site, a to know as well. classification of the property and (C.R.S. § 24-65.5-103.3). abruptly halted without any sense process that entails digging up If your seller or predecessor whether it carries an agricultural As such, it’s not unusual to of when things would return to the site to introduce additional in interest has pursued specific classification (which results in a uncover during title review a normal again. fill material that is then re-com- zoning for your property, often lower assessed value) that, where surface use agreement where the Little did anyone know at the pacted with existing fill material. the zoning ordinance specifying possible, may be advantageous mineral estate owner has agreed moment that the Colorado devel- Sub-excavation will mean more the zoning for your property (i.e., to maintain before development with the surface estate owner to planned unit development) will opment environment, at least in heavy equipment work and will begins. limit oil and gas operations areas be of record. If your predecessor n The mineral estate may be the homebuilding and industrial require first removing existing dirt to specific areas of the property. subdivided the property, the plat disconnected from the surface sectors, was about to turn back before introducing new dirt. The Alternatively, some mineral estate and subdivision improvement or estate. Another useful item con- around to business as usual, on additional construction work will owners may have agreed to relin- add cost to the budget, and the development agreement also will tained in your title commitment a dime. These sectors quickly quish surface use and access alto- bounced back not in spite of the developer also may have to iden- be of record, and these documents will be the initial or first severance gether. A prudent buyer will be pandemic, but because of it. tify a source for the new dirt. If will be essential reading. Again, of the mineral estate from the sur- familiar with the minerals situa- It’s not hard to come up with the properties adjacent to the site don’t assume your development face estate of one’s property – to tion for a target property and have explanations. With one’s residence are vacant, those owners may be agreement is a standard form the extent this has occurred. Your confidence that any mineral rights instantly converting into an office, amenable to letting the developer agreement. On the other hand, it’s title commitment will not contain holders have been sufficiently cor- class room, quarantine facility and “borrow” dirt, but that’s more of better to anticipate, and look for, a chain of title for minerals, but ralled off site or to a portion of the day care center all at once, the a term of art, as the developer project specific terms and condi- there may be enough of record for target property where oil and gas desire for one’s own space had will not return anything once the tions. It doesn’t mean that they’ll you to piece together the current operations won’t interfere with never been more acute. Home- project is complete. The irony here be there, but you can’t really afford condition of the mineral estate to surface development, use and builders, who like everyone else is that in construction parlance, to miss them. your property. Identifying third When reviewing your title parties that may own or lease enjoyment. had immediately pressed pause in the phrase “dirt cheap” doesn’t n We’re only scratching the work, be wary of any obligations the mineral rights to the subject early spring, recommenced land make sense. If dirt goes for $4 per surface. acquisition in earnest. cubic yard, for example, and hun- in any instruments that may run property, when the mineral estate During the due diligence With no one leaving their dreds of thousands of cubic yards with the land. By virtue of title has been severed from the surface process for land acquisition, it is homes, experienced online shop- are needed, there’s nothing cheap vesting in you or your entity, you, estate, is another essential part of necessary to obtain a soils report, pers placed orders with reckless about it! as the owner, become responsi- any due diligence investigation. If carefully review the condition of abandon and other consumers dis- n The title commitment as ble for such obligations (Lookout your minerals have been severed, title to the subject property, and to covered that just about anything development guide. For some, Mtn. Paradise Hills v. Viewpoint, the mineral rights holders will identify which third parties may was available online for order and reading title work is as exciting as 867 P.2d 70, 73 (Colo. App. 1993)). have the right to use the surface of own or lease the mineral rights to home delivery. The result was an going to the dentist. Title work can It’s not unusual to uncover a your property for extraction and the subject property, and if those immediate stress on existing logis- be about as dry as it gets, but the cost-sharing agreement burden- operations (Gerrity Oil and Gas parties have corresponding sur- tics centers and the need to build title commitment (and documents ing an unimproved parcel with Corp. v. Magness, 946 P.2d 913, 926 face use or access rights. This is more. and instruments listed as excep- reimbursement obligations for (Colo. 1997)) absent a waiver of or by no means an exhaustive list of Cut to the present, and one unan- tions on Schedule B-2) for your infrastructure constructed by an contractual agreement to modify issues or a concise due diligence ticipated result of the pandemic is subject property often will be a adjacent property owner. A pru- such surface rights, subject to any checklist, but more of a brief intro- the continued need for raw land. treasure trove of information and dent buyer will want to contractu- applicable local government and duction into the myriad issues one As some short-term investment provide a synopsis of the entitle- ally obligate its seller to extinguish Colorado Oil and Gas Conserva- can expect while undertaking due focus shifts to unimproved dirt, ment and development history of such obligations or, at the very tion Commission Regulations. diligence and feasibility investi- it’s important to keep in mind that your property. least, budget for the cost of paying The Colorado surface develop- gation for a land development the feasibility process for raw land Annexation agreements, for off the neighboring owner. ment notification statute (C.R.S. deal (such as restrictive covenants, is markedly different than the pro- example, which contain the terms The tax certificate for the proper- § 24-65.5-101 et seq.) is in place ditches and canals, blanket ease- cess for improved assets. This arti- and conditions of a property being ty also is important to review at the to help address the ongoing ten- ments or, conversely, utility lines cle provides a general introduction included into a municipality and inception of the feasibility process. sion and literal priority of place or flow lines crossing a property to conducting due diligence inves- being entitled to the services of Often the tax certificate is only between mineral estate owners without the benefit of an ease- tigations during the land devel- such municipality, usually will reviewed in the context of closing (who have surface rights) and sur- ment). In short, when commenc- opment process, with a particular be of record. Don’t assume every the deal, to determine the amount face estate owners (who want to ing your due diligence process, focus on evaluating the condition annexation agreement is the same, of any unpaid taxes and to prorate develop the surface of their prop- and as with the last eight months, of a target property’s soils, title and or just a boilerplate agreement. the tax liability between the par- erty). The statute requires the sur- be ready for anything and expect minerals. To the contrary, the annexation ties. However, the tax certificate face owner to search the assessor’s the unexpected. n Do the dirty work. It’s no agreement for your property may represents an important inves- records to identify the current Scott Ross and Will Soper of Fox secret that the feasibility process have certain payment, dedication tigatory tool. The tax certificate mineral rights owners or holders Rothschild LLP contributed to this will entail vigorous investigation or development obligations that will identify those various govern- and to give them notification that article. s