Entitlement risks can present special problems when acquiring and developing land. It’s difficult to know what curveballs city council members and other local government agencies may throw at developers. However, they aren’t the only ones involved when it comes to entitlement risk.
In this article, we’ll get an overview of what entitlement risk is and what to expect when trying to value a property with significant entitlement risk.
What Is Entitlement Risk?
Entitlement risk occurs when trying to acquire a property and develop it for a specific use. Entitlement risk can include zoning as well. However, if the property is zoned for the developer’s use before being acquired, zoning doesn’t present any risk.
Specific entitlement issues that developers might run into include delays, disagreements, additional permit costs related to decisions from the city, local government agencies, and the community. All of these groups will have their view about how a developer should use the property.
Suppose a developer acquires a property thinking all is well, submits permits, but hasn’t confirmed anything with the city or explored potential community opposition. In that case, he might be in for a rude awakening.
Only by doing a lot of digging into potential issues, depending on what the developer wants to use the property for, one might find entitlement risk ahead of time.
Valuing a Property With Significant Entitlement Risk
What is the difference between a property with normal entitlement risk and one with significant entitlement risk? Well, it’s subjective. Both need to be worked out, but one will require more work and time than the other.
Consider what’s driving these risks: It’s often city council members with different agendas, interpretations of the rules, and views on how a developer should use the property. If the rules were laid out clearly, then there wouldn’t be so much disagreement and interpretation. But that isn’t always the case. And sometimes, a group with lots of backing can have a large influence.
But even if a developer can work through local government agencies to reach a resolution, another major hurdle can be community opposition. This could even mean the developer may have to fight lawsuits and face negative public PR.
There isn’t a strict right or wrong when it comes to entitlement risk. A community can make an excellent argument as to why a developer is ruining their city. A developer can make just as good an argument about how a new business will help create jobs and bring growth to the area. But of course, if people don’t want growth (because they like things the way they are), what the developer has to say may not make much difference. The developer will have an expensive, time-consuming, uphill battle.
So then, how does a developer value a property with these kinds of issues? An entitled property is one that is basically without entitlement risk. It means the developer was able to get the necessary permits, approvals, and utility easements for a specific use.
Anyone who purchases the property for that use should not experience entitlement risk. This property should have a much higher value than one that isn’t entitled. However, if lots of time has passed since the property was entitled, it could mean that the next developer must start all over.
A developer with a new project that hasn’t dug into any potential entitlement issues faces the most risk and, therefore, will have a lower value than a property with known risk. Conversely, a property that is fully entitled and thus without entitlement risk is likely to have the highest value.
Finding various entitlement risks requires a knowledgeable team. Knowing city council members, local government agencies, and being familiar with the local community can all help in the discovery of entitlement risk. Ultimately, that can help reduce overall risks to a new land development project.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
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