Understanding Land Entitlement Helps You Maximize the Value of Your Property
What is Land Entitlement?
Land entitlement is the legal process of gaining all necessary approvals to develop a piece of property for a specific use. The value of understanding the entitlement process isn’t reserved for just homebuilders or developers. Landowners and real estate investors are well advised to educate themselves because the process influences the value of their properties.
The land entitlement process is complicated, politically nuanced, time consuming, and expensive because approvals are required from numerous government agencies at the local, state, and (occasionally) federal level. These agencies possess the legal authority to grant the permissions required to transform raw land into developable property.
More importantly to investors, property that is fully entitled for the developer’s intended use is significantly more valuable than raw land without entitlement. For this reason, it is critically important to allow the developers time to work through the process, because the developers have the resources, and they are financially motivated to extract the most value from the property.
In our market, the entitlement process requires between 6 months to 1 year – and sometimes longer depending on the complexity of the issues. The chart below is a simplified framework illustrating the progression of raw land moving through the process – culminating with fully entitled building lots.
In many instances, raw land is not zoned for the highest economic use. Raw land is often encumbered by physical defects and legal issues. Examples of physical defects include flood zones, soil condition, and terrain. Examples of legal encumbrances are property liens, easements, unresolved boundary disputes, and encroachments.
In addition, raw land does not usually carry approved access to public utilities, site plans, or the zoning designations to optimize the properties’ values. These matters must be legally resolved to obtain the preliminary building approvals, and the resolution process is both time consuming and expensive.
Because of this, raw land is valued at approximately 60% of its potential total economic value. More importantly, it is in the investors best interest if they allow the developers lead the entitlement process.
Tentatively Approved Land
Tentatively approved land is property that has been rezoned consistent with the developer’s intended use. At this stage, the property includes a subdivision map that has been tentatively approved by the municipality to ensure maximum economic value. At this point, zoning approval requires an approved site plan, complete hydrology and soils studies, boundary and topographical survey, tentative approval of utility connectivity, and an approved traffic impact study.
These deliverables require unique professional expertise, and they are also expensive. Hydrology and soil studies require certifications from geologists. Utility location and capacity studies, site planning, traffic studies, and grading plans require civil engineers. Furthermore, legal counsel with subject matter expertise is required to effectively navigate the complex political landscape. It is not uncommon for 3rd party entitlement costs to range from $25,000 to over $100,000. Historically, the developer contributes all of the entitlement costs and the landowner contributes the time.
Tentatively approved land is valued at approximately 80% of its total realizable value because a significant percentage of the development risk has been mitigated.
Fully Entitled Land
Fully entitled land is property that has obtained the signatory consent of all government and regulatory authorities. For this to occur, the property must have all final development plans approved by all governmental and quasigovernmental authorities. This includes securing the utility providers’ commitments to deliver service, Buildable Improvement Plans, and payment of all utility and impact fees.
The incremental cost to the developer to move from Tentative Approval to Final Approval ranges between $100,000 to over $250,000.
Fully entitled property is rezoned to its highest and most economically viable use. Sunbelt Development & Realty Partners frequently leads rezoning initiatives on behalf of our clients. We do this because rezoning increases building densities – which, in turn, increases property values to buyers and sellers. For example, in Las Vegas the R-1 zoning designation grants approval to build 1 property per acre, while R-2 zoning provides for the development of between 6 – 12 units per acre. Successfully rezoning and entitling a property from R-1 to R-2 may triple the property’s value.
Fully entitled land requires additional capital investment and is valued at 100%.
Finished Building Lots
Finished building lots are completely prepared for vertical development. This requires additional investment and further eliminates the development and market risk to the builders. At this stage, all offsite and onsite improvements are complete. All common area improvements are complete (i.e., streetlights and sidewalks), and utilities are in place (to the back-of-curb). At this stage, the buyer/developer can begin building homes within weeks of acquiring the property.
Developers will pay a 10% premium price for fully developed, finished building lots.
Sunbelt Development & Realty Partners
Sunbelt Development & Realty Partners specializes in land development in Nevada and Arizona. We have a team of specialists in place to efficiently navigate the entitlement landscape for our landowner clients, investors, and developers.
We have been in the land development business for more than 30 years. During this period, we developed, brokered, and owned more than 25,000 acres valued at more than $2 billion. Our investment partners and clients include some of the largest builders in America. Our builder client list includes KB Homes, Lennar, Richmond American, Beazer and Tri Pointe.
We welcome the opportunity to help you maximize the value of your property.