Sales Price of Undeveloped Property Can be Subject to Adjustment
Contract Price Isn’t Always the Actual Price
Sellers of acreage properties for other than farm and ranch use can be in for a big surprise when it comes to the actual price a buyer is willing to pay. This is true because many contracts for the purchase of large tracts – particularly for development -are calculated on a “net area” basis.
Under net area contracts, Sellers sometimes receive far less than the purchase price that would be paid under a “gross” sales contract. In real estate contracts, “gross area” is typically synonymous with “total area.”
Understanding how net area contracts work, and why developer-buyers use them, is essential to a Seller negotiating the best deal for a large tract of unimproved property.
What Are Net Area Contracts?
The general concept of net area contracts is that the sales price is calculated based upon the amount of the Seller’s property that is “useable.” Conversely, “non-useable” property is excluded from the calculation of the purchase price.
For example, if a Seller’s 24 acre tract contains 2.3 acres in a floodplain, the purchase price will be calculated on the unit price (price per acre or square foot) of the 21.7 acres that is located outside of the flood zone. The 2.3 acres located in the floodplain is excluded from the unit price.
Net area contracts are most common where undeveloped properties are being sold to a developer who intends to build on the property. The rationale behind these contracts the developer-buyer’s objective of delivering a finished project (developed land following construction) that can be competitively marketed to end-user buyers or tenants. This analysis determines the feasibility of developing in a given location, and limits the maximum price the developer can pay for land acquisition for any project.
Defining “Net Useable” Land
The definition of the term “Useable Land” is critical to understanding how much a developer-buyer will pay for a property under a net contract. Generally speaking, the term “net useable land” refers to the total (or “gross”) area of the Seller’s land less flood plain, wetlands or other impediments where improvements cannot feasibly be constructed.
In addition to flood zones, areas of property located in public roadways, easement areas and right-of-way areas are generally excluded in a “net area” contract.
Developers typically calculate “net useable land” as that which can be used for buildings and associated parking. This, however, does not mean that the land excluded from the purchase price under a net contract is entirely non-useable. For example, improvements such as stormwater management facilities can sometimes be constructed within flood areas otherwise characterized as “unusable.” Thus, non-useable land is not the same thing as worthless land. This fact often frustrates Sellers when considering a developer-buyer’s offer.
How is Net Useable Land Determined?
Most often, the determination of the area of land that is useable and non-useable is determined by a Survey of the Property. Typically, the Earnest Money Contract will provide that the total purchase price will be adjusted based (up or down) upon based upon what the survey reveals about the area of land that is excluded from gross area.
Can Sales Price be Negotiated?
Until executed by both the buyer and the seller, real estate contracts are negotiable. Even in a Net Area Contract, the purchase price of a Seller’s land can be negotiated. However, Net area contracts can be complicated, and developers are generally sophisticated.
Sellers presented with net acreage contracts are wise to contact an experienced real estate lawyer to assist in negotiating purchase price and other contract terms.
