Ask any developer, and they will likely tell you that it is incredibly hard to pencil out a deal in today’s markets. With new construction costs at record high levels, the nearly absurd valuations on land, and massive levels of cash being poured into real estate “strategy”, good deals are few and far between. In order to make a deal work, the developer has to create value. One of the most valuable additions a developer can do to a given land is to obtain the necessary entitlements.
Entitlements are typically land use permits that enable you to increase the value of your property by expanding the boundaries of what you are able to build (i.e. increasing the amount of buildable square footage) or removing certain building requirements (i.e. lessening the amount of required open space). These permits are necessary to the development process when seeking to optimize your return on investment.
Municipalities typically allow entitlements as incentives for developers to build in less desirable areas, build properties with (more) affordable housing units, and develop projects that are beneficial to surrounding neighborhoods.
The entitlement process has a reputation for being a daunting task, and unfortunately, it is! However, if done correctly, entitlements can add material value to your acquisition or development. For example, entitlements can allow a developer to obtain zoning variances or achieve higher density, which can be the difference between a successful project and a flop.
Anything above a minor zoning regulation adjustment requires zoning variance approval. Variance requests can include height increases, lesser amounts of open space, and other adjustments that can increase buildable value. Although this is often a rigorous process, the permits (if granted) are well worth the effort. Zoning variances can often make a project successful when otherwise the deal would not pencil out.
Developers may try to use entitlements to obtain more residential units and a lesser parking requirement, which would increase the project’s value. Typically, the increased density comes in the form of several incentives, including height increases, yard or setback modifications, and increased number of stories. The specific needs of the property determine the incentives used.
Work with Local Professionals
Because it is a complex process that can vary substantially from jurisdiction to jurisdiction, the developer should work with local professionals, such as a zoning attorney and a civil engineer, who understand the entitlement process and who can provide guidance in terms of expectations and the likelihood of a successful outcome, as well as push for getting these approvals.
The truth is that even when you have a local powerhouse by your side, expect the permitting process to be long and full of challenges. It can easily take six months to over a year to obtain the necessary entitlements, so a developer must be willing to be patient.
Options with Entitlements
Once the investor or developer has successfully completed the entitlement process, they have a few options. If you are looking to quickly capitalize on the created value, you can flip the land or property to a developer who will pay for the now more valuable asset. This could range from tens of thousands of dollars for a smaller project to millions of dollars in profit for bigger ones.
The second option is for a developer to hold onto the asset and develop the project themselves. This would naturally require a lot more work than the first option, but the potential payout is also much greater.
Keep the entitlement option in the back of your mind as you analyze various land deals. Talk to a local zoning attorney and see how they can be of help. Because entitlements are not easy to work through but are effective tools to add value, wrapping your head around them can make an otherwise bad deal become a hidden gem.