Previously, we discussed why it is important to review the various real estate investing (REI) strategies and determine which one fits you best in your current situation. If you missed it, here’s the link to these articles:
- Identifying the Top Strategies: mikelima.com/which-real-estate-investment-strategy-fits-you-best/
- The REI Matrix and Wholesaling model: mikelima.com/part-2-which-real-estate-investment-strategy-fits-you-best/
- Fix and Flip model: mikelima.com/part-3-which-real-eastate-investment-strategy-fits-you-best/
- Buy and Hold model: mikelima.com/part-4-which-real-estate-investment-strategy-fits-you-best/
In this article, we shall explore two of the vehicles in the bottom section of the below Matrix – which are typically more advanced investing Models. For the most part, these Models require significant capital and/or expertise in order to execute them successfully. This article introduces you to Land Entitlement and Land Development.
Land Entitlements & Land Development
Imagine you’re out driving around and see a 40-acre patch of farmland on the edge of a growing metropolitan area. I’m sure you’ve seen examples of this many times, either in areas near where you live, or in your travels. It could be a dairy farm, with cattle, feed silos, and old barn structures. Or maybe it’s endless rows of corn, cotton, or soybeans. Or it could be an old grove of fruit trees, or a tree nursery, with irrigation lines carrying vital water to it.
Instead of farmland, you could be driving by an old drive-in movie theater (remember them?), which was often fairly convenient to the population of the town, but has become a thing of the past, replaced by beautiful climate-controlled theaters emerged, with large comfy seats, excellent sound systems, high definition video, and that amazing smell of buttered popcorn wafting in the air! Many modern theaters have taken it to the next level in some ways, with cocktail bars and restaurant services in addition to the traditional counter-top snack service.
Whether the land is farm-related or was used for a drive-in theater or other use, each year thousands of parcels like this get redeveloped and become housing projects, shopping malls, sports complexes, and office parks. As times change, and as towns grow, land used for one purpose often becomes more valuable if it were used for another purpose. The process of preparing that land, and then physically altering the land, is typically called Land Entitlement and Land Development.
The two terms can be closely aligned with each other, and for simplicity, I will set a demarcation line as follows:
Land Entitlements relates to the legal adjustments that affect the rights to develop the property in a certain fashion; whereas
Land Development relates to the physical development, or redevelopment, of the property, once those rights have been obtained.
So the key point of differentiation in how we shall look at these models, is that the Entitlements work involves paper and process, while the Development work involves physical moving of earth, including demolition, grading, and then construction. It’s hard to imagine all of the activities that need to happen, in order to convert that farmland into a master-planned subdivision; or to change that drive-in movie theater into swank new condominiums to house scores of new families.
Sometimes, one investment company will be driving the entire process – from drive-in theaters to condos – but oftentimes, one group will do the non-physical, planning & legal work that needs to be done (Entitlements), before another investment group (perhaps a Home Builder or group of Home Builders) will step in and buy the project at some point, and perform the construction (Development) activities. Projects like the examples mentioned above will generally take several years (or longer) and many millions of dollars to reach completion and transformation from the old use to the new one. For purposes of this article, we will focus more on the Entitlements process than that of the physical Development of the property.
As the above matrix shows, these models are not usually the best ones for someone who needs cash now, or a steady stream of cash within months. While it is possible in some locales to quickly and inexpensively achieve certain Entitlements (such as a Lot Split, which can sometimes be done faster and cheaper than a typical Fix/Flip project), these models are really best for the well-heeled, experienced investors who have capital and other resources at their ready disposal. And they normally take many months, or even years, to complete.
Here are some indicators of how the Land Entitlements and Land Development models compare with the Wholesaling, Fix/Flip, Buy/Hold, and other models, including traditional realty (realtors):
|Indicator||Grade and comments|
|Speed to $ Proceeds:||Low
These projects take time. And they involve government agencies, and sometimes public meetings, which can be notoriously slow with their review and approval processes. This is not a path to fast cash. The process often takes a year or more.
Typically requires much more capital than Wholesaling, Fix/Flip, or Buy/Hold. If you bring in zoning attorneys or consultants to help you with the processes (which is an excellent idea if you aren’t an expert in this area), those hired guns are pricey. There are numerous fees along the way; plus if you own the property, you also are incurring holding costs as you wade through the process.
Since your project will likely take a year or more for the Entitlements, and even longer for the build-out, there is a significant risk that the market will hit a downturn, as opposed to the other potential investing models.
|Time Intensiveness||Medium to High
Considerable time will need to be spent, but often times you will be outsourcing much of the work, including various engineering services. And the time expended will come in bunches, as there will be lulls as you wait for the municipalities to review and respond to your requests and plans. But significant time will be needed, and these projects are often complicated and susceptible to unforeseen issues.
|Reward Potential||Very High
Quite often, these projects are adding massive value to the underlying land, as the Entitlements provide for higher and better use of the property, which translates into higher potential sales values. These are lengthy and complicated models, but whether you build the project yourself, or sell it off once fully entitled, this model offers potentially staggering rewards!
|Typical Annualized ROI||High
Even with the longer project cycles pertaining to these types of projects, the Annualized ROI on Land Entitlement/Development projects can often be 20 – 100% or even more.
Why would my project need Entitlements?
The Land Entitlements process can be very expensive, complicated, and time-consuming. Depending on the project, you may have to jump over hurdles by the city, county, state, and federal governments. So why would you want to volunteer for such a potentially painful project? Well, here are some reasons why you may want to take on this process:
These are exceptions to the current zoning granted by a municipality because they deem the new use of land to be either necessary or in the better interest of the community. An example of this could be granting a Religious Use permit to a land parcel that is zoned Residential, for the purpose of allowing a church to serve the community.
If your plans for your land does not conform with the underlying zoning that is already in place, you may want to embark on this rezoning process, which can be lengthy and unpredictable. Your chances of success will improve if there are other nearby properties that have been rezoned to your desired designation, or if there is a general plan for the area that supports your desired use. As an example, that Agricultural land that was home to a cornfield before may be rezoned to Residential land to be used for a suburban housing project.
If you don’t need to change the actual zoning designation, but you need some adjustments to the current zoning, such as the distance of your setbacks from a neighboring property, the number of parking spaces, or the lot coverage, you will need to go through a Zoning Variance. Depending on the municipality, you may need to have a public hearing, giving the community a chance to support or resist your desired changes. These typically require less time than Rezoning, however they still often carry risk with them just as Rezonings do.
Road or Utility Approvals
Many development projects will require new access via roadways, or new utility services to the land. The municipalities and utilities will weigh in and will need to approve the plans prior to construction. Sometimes, land will need to be donated or dedicated (easements) so these improvements can be added.
Here is a link to an excellent resource, from the National Association of Home Builders, which offers a comprehensive (and nearly exhausting) checklist and overview of the considerations and tasks that go into an Entitlements and Development project: https://www.nahb.org/~/media/NAHB/advocacy/docs/industry-issues/land-use-101/orientation/land-development-checklist
Here is just an excerpt of one of the sections:
The gamut of items that needs to be considered is huge. On projects that I have done, we have encountered and had to find solutions for many of these items. For instance, we have had to commission (and pay for) a survey to prove to the US Army Corp of Engineers, that a tiny wash/creek bed was not in fact a navigable waterway, under section 404 of the Clean Water Act. Fortunately, they concluded that this minuscule wash, which is bone-dry 99.9% of the time (and runs with about 3” of water in it about twice a year after a rare rainstorm in Phoenix AZ), was not a navigable waterway or a wetland. But the point is, since others have been reckless with development in the past, the government has legislated to put in safeguards to be overly careful in some cases. And so these projects are typically much more complex and have lots more hurdles to overcome than your garden-variety fix/flip does.
On another project, we had a large trove of petroglyphs, which are rock art created by the native Americans. This particular collection was from the Hohokam people and was estimated at about 500 years old. Even though the petroglyphs had been there for centuries, and had already withstood development around them, once we contacted the City to do a lot split, they immediately called the City Archaeological Office. The archaeologists came out and spent a couple of days photographing and documenting each of the 244 ‘petroglyph elements’ they found. As the new owners, we got presented with the ~$5,000 bill. While we support the preservation of the beautiful and historic artwork, this was an unexpected cost that had to be borne up front, before we surveyed the property and completed our lot split.
Please note that land entitlement and development is often very specific to the locale that you are operating in. A 10-acre rezoning case in Phoenix could require a very different process than a 10-acre rezoning case in the Chicago area. You will need to talk to the local municipalities and understand what the process is for your specific project, and then set a plan to accomplish it all. It’s likely to require a lot of blocking and tackling along the way, but there indeed can be a nice pot of gold at the end of the rainbow.