What is the actual procedure through which this happens? You buy the land and then are granted permission on a discretionary basis? It seems to me that if you were a small business this becomes much harder to participate in because you need to acquire and hold the unproductive asset.
This would mean that land use tends towards that which large firms (which can sustain the costs easily by self-financing) find useful.
My employer went through a similar process, not for a data center but for a large recycling yard/center. We had to buy the land first, and it was basically unproductive for 2.5 years of mostly waiting for permits, and it was already zoned industrial so no zoning changes were needed.
The whole project was several million in expenses before even making a dollar. We aren't huge either, the permitting was not supposed to take that long it but a real strain on the business.
So yeah, you're correct. The current process favors large firms, at least those large enough to absorb the cost for multiple years or however long permitting takes, which in some municipalities can be a very, very long time.
It’s unusual to buy the land and take a gamble on its utility, at least whenever datacenter construction is involved. Purchasing parties are risk averse to this exact scenario and work hard to craft contracts that reduce risk.
Often the choices are —
1. Buy land at $/acre that reflects very little premium, based on a short feasibility study, but without any ultimate contingency that permitting will occur. This is your example. But problematically all permitting applications are typically public record, so when you fail, the land can’t be sold on to someone else as if that didn’t happen, any sophisticated buyer will know the exact issues the city/county had with your usage. Land often transacts onward at firesale prices under these circumstances.
2. $/acre for land is bid upon at a substantial premium reflecting the future value as a datacenter, it remains under contract for potentially years pending outcome of approvals, then it transacts. Permitting being denied usually results in either no money changing hands or a small termination fee reflecting the carrying cost of the land during that period. If permitting works out the seller of land walks away very happy as the $/acre was extremely lucrative.
I would not be willing to let the seller use the land under contract to avoid the risk of something happening that devalues or disqualifies it for its future intended purpose.
No you don’t. The overall risk is baked into the strategy, but any individual plan is always a toss up, and they have insurance policies for if one or all fail
Fun fact: Large businesses are often tapped to write the laws intended to target large businesses. The process is called “model legislation.” Fox and henhouse.
Well, businesses — and all parties — who will be affected by legislation should be able to provide input. Otherwise we too often get clueless legislation that is massively mocked and rightly bemoaned on this site — because the legislators have no real clue of the technical issues involved.
Of course, the businesses should be only one part of the expertise that goes into writing the laws; other experts MUST be involved, or it will indeed be a fox and henhouse situation where the fox designs the legal locks so they can always be opened by foxes...
That can be an example of model legislation but, broadly, model legislation is created by an organization for use as an example for multiple different legislatures (usually states). Everyone from think tanks, busineses, the EFF, the ACLU and PETA draft model legislation.
I’ve had multiple friends try to start businesses that got stuck on this: You can’t really get permits until you have the property and start drawing up plans.
For simple businesses like a retail store in a location that has other retail it’s not too risky to bet that you’ll be approved, too.
For businesses with unique needs or that happen to be in the public crosshairs, you’re putting a lot at risk in the process.
The process favors big companies and developers who have established relationships and “connections” with the planning boards.
The situation is even wilder in some other countries, both more and less corrupt than the average US municipality. In some places you’re not getting a permit at all without a sizable bribe, or having an in with the planning board.
In my city one of the aspiring developers tried to run an expensive political campaign to get a family member into an office that could have helped with their approvals. People caught on and didn’t like it one iota.
It’s true it costs money to then hopefully make it. :)
Architecture, civil engineering, and other design and permitting fees can easily be 7–10% of the overall cost of smaller projects. Even in large projects they’re often 4-5% or more, and the number of billable hours for complex impervious surface and stormwater management adds up fast, as do engineering stamped plans for structural and other factors.
Most cost here is also incurred fairly early before you have any vertical construction done — Phase 2 in a program after land acquisition. So you feel like you’re spending a ton on paperwork and you can’t see anything yet.
You CAN spend a bit of money even before land acquisition on quick feasibility studies but in U.S. terms for something like a residential, small commercial or light industrial project every parcel you go “I like that, can it work?” you are dropping $15-50k during a 45-120 feasibility period. Should it 100% not work out you are NOT getting reimbursed that by the selling party. You’re out the money. Even within 90 days you may find some uncertainties like SEPA approval won’t close before you have to say deal or no deal on the parcel acquisition. This is quite unlike massive companies doing business where the land may not change hands until essentially every approval is locked in (but should it not work out the buyer may be out millions in engineering fees paid to try and make it work).
Borrowing to buy land and then borrowing more to build something is also treated very differently by most lenders. It carries tremendous uncertainty versus you buying a preexisting lot and structures which they know how to value. That’s fundamentally something that causes unwillingness to lend, or changes the rates and down payment or security terms. In contrast with a conforming mortgage for a SFR (single family residence) at 6%, borrowing to build (a construction loan) can be 10-14% APR, often secured via personal guarantee and other assets you possess, and then you have to convert to a personal or commercial mortgage after you complete building what you wanted.
Borrowing to buy the land is even more complicated again — you very often must be able to pay cash for land, and then just borrow to do the construction. Borrowing for both especially with limited assets to secure against will always be a polite “Sorry; we can’t help.”
Pretty much. The discretionary nature of permitting, and other add-ons like CEQA, pose an enormous, and worse, unpredictable, burden on attempting to start a business in many places.
It'd be one thing if the requirements were merely onerous, but the discretionary nature adds corruption greatly favoring incumbents, the deep pocketed, and those willing to disregard the rules (start-ups with low capital requirements).
Never mind the timeline of these processes. Permitting can take 18-24 months, as can items like basic utility upgrades (adding 480V service, for instance, to an existing building can be an 18 month ~quarter million dollar endeavor.)
The permitting authority gets to pretend like it's not discretionary because the process has some "if we exercise out discretion to say no at this point then you sue us" thing to it that only megacorps with a legal team can afford to use
Here in Orlando two large builders bought about 90% of downtowns empty lots (and several older buildings) promising new high rises in 2022, then threw in the towel after evicting all the tenants and now most of Church street station is completely empty. Of course local government had put nothing in the agreement about time frame of completion, what happens if the builder gives up, etc.
So now, all of it sits abandoned, no construction started, and now its not even worth building as they claim "down town is dead".
This is likely the fate of that land, a write off until its so valuable they can sell it to someone else.
Depending on things, you might enter a land purchase (or lease) contract that's contingent on issuance of a building permit.
But a seller would probably prefer to sell without contingency, so what terms are available depends on market conditions.
Title insurance for residential real estate may sometimes cover properties that are unbuildable due to unsatisfiable permit requirements.
All told, it's easier as a buyer if you purchase an existing structure that was built under permits and is currently in use under appropriate occupancy permits.
A comment on HN a few years ago in a thread about car washes brought this to light a little bit for me, the proliferation of subscription car washes everywhere in the US (self storage too) seems like it can't possibly make sense financially, but when you think about developers that also want to speculate on the land, car washes and self storage are about as easy as it gets to develop and maintain some cashflow, then you can sell or redevelop later. Now I am expecting a spinoff to Mister Inference and Quick Flops as these sprawling networks of carwashes turn into data centers in 2030
I would imagine car washes to be one of the more difficult kinds of businesses to operate just to hold a lot. You often need a lot of work on drainage and permeability to ensure you're not contaminating local water systems with your car wash.
Yes it's called zoning, it's why we have a housing shortage in the USA. It makes building new things nearly impossible. It's also why none of the homes in Los Angeles that burnt down in massive fires a few years ago are being rebuilt, and likely won't be rebuilt for decades (if at all).
Zoning laws. Many parts of the US but not all have land use zoning. The zoning for any property you buy is public record, so any business knows well in advance of what they are buying. If you want to deviate from the zoning you have to submit an application for that zoning variance which requires usually a community hearing.
Neither small or large businesses really have any big advantages here. Got to win over the community. If anything, the small business may be local and the operators more readily able to convince the community for a variance than some corporate lawyer.
Zoning is only part of it. If a plot is already zoned industrial, but is empty, you still need to get the permitting for building construction, utility hookup, waste water & stormwater, environmental inspections, etc.
It varies from state to state (and city specific laws), but to go from empty land to productive asset can take several years.
Or better yet, farmer Johnson lets his D rate hay plot grow over because he never really thought it was worth it and the son that was managing that plot left for college.
Someone buys the plot 30yr later. They can't clear it and farm it without spending a quarter mil on environmental permitting because the government sees it as a pre-existing forest and the drainage ditch farmer Johnson's dad dug back in 1988 is now a stream (i.e. protected wetland) so they want the new owner to get the same permits that someone bulldozing a swamp for a strip mall would.
You see comparable fact patterns on every axis of regulation.
The community hearing is the easiest and cheapest part if your use is mundane.
The government will still screw you out of hundreds of thousands (mostly in the form of "pay these other people four figures for study X and plan Y" type requirements) to even get to that point though
Also for a large enough utility hookup you will need to coordinate with the utility and or government since you can’t just plop down a large consumer on any old power line or pipe.
SMaller business would find land already zoned for what they want. That makes it much less of a fight. These large companies find the land they want, then fight governments to allow the code and zoning changes to allow them to do what they want. It's a backwards process, but they think it's fine because they can afford it, and don't stop to realize that if they stopped letting execs make the decisions of where it goes, then a facility professional can find better land that they could get up and operational much faster.
I've seen it a decent number of times in my life. The exec gets their hart set on a specific building or parcel, but literally no one else in the entire project cares because they know it doesn't matter. Then the site desired won't work, and half the time the project fails.
I was at one company years ago, the execs were bound and determined the company was going to move the HQ from one building to another a handful of miles away. They saw the floors we were to rent, were completely set on that, and then proceeded to act like the deal was done. They had the credentialing department put in a change of address to MEDICARE before we had even signed the lease! We were 6 weeks from the move day when FINALLY there was a blow up in a meeting where people told the CEO and COO they were delusional and that we had to cancel the plan because we STILL DID NOT HAVE A SIGNED LEASE. There had been major negotiating hurdles between facilities and the building owner, but the C suite acted like none of it was happening for months. They spent 6 figures prepping for a move that in the end never happened. Building owner went bankrupt, we didn't move and instead just rented another suite in our own building.
This would mean that land use tends towards that which large firms (which can sustain the costs easily by self-financing) find useful.