What is Entitlement in Real Estate?

Concerning real estate development, entitlement is similar to approval. A developer must obtain an entitlement from the local authority to proceed with their project. If you think of zoning as the local rules that govern development, getting an entitlement is the goal. Zoning regulations contain broad restrictions on what type of building can be built in a specific area, while an entitlement is an approval for a particular project.

Entitlements are typically required before development can begin in the following scenarios:

• Ground-up construction. To build on vacant land, you must obtain an entitlement from your local planning commission.
• Change-of-use entitlements are necessary when you want to convert an existing building to another use. For example, if you're going to convert unused office space into residential property, you need entitlement approval.
• Adding a new façade is a significant change requiring the developer to obtain an entitlement. This requirement ensures that the building's exterior adheres to local conditions.

What is the entitlement process?

In many jurisdictions, developers must submit an application to the local planning department for review. The application package likely includes a general proposal, some required technical and environmental reports, and a design rendering that details what the proposed building or complex will look like on completion.

The planning department will review the proposal and compare it to existing zoning and other local regulations. The planning authority often returns the application with comments or questions the developer must address. The developer needs to respond within a specified time. After that, the planning body may approve the project with certain conditions. For example, the planning commission might require the developer to construct a road or add water lines to obtain approval for a subdivision. Other conditions might relate to changing the height or number of buildings or requiring added parking.

The length of the process and the likelihood of being required to comply with numerous conditions depends in part on the complexity of the proposed development and, in part, on the location. Some local areas are strict enforcers of rules, while others may encourage and support growth by easing the entitlement process. In any case, the application approval timeframe typically starts at three months and, in some areas, extends beyond a year.

How does entitlement add risk to a project?

If a project has not received entitlement approval, potential investors should be aware that the project will most likely take longer to complete and might never happen. The permit process is not straightforward, and local politics can derail a promising project. The potential for obstacles and delays is referred to as entitlement risk, and the risk may be significant in some situations.

Entitlement risk is difficult to quantify. Even if a proposed development aligns with local zoning and other requirements, an entitlement might be denied due to significant community opposition to a project. Local government representatives may hesitate to approve a retail development that local residents oppose or to support a condo conversion that threatens affordable housing. 

Developers and investors must carefully consider the potential for delays and even rejections when proceeding with a project that lacks approved entitlements. Sometimes, a project that has obtained needed entitlements is significantly more valuable than one still facing the risk of delay and rejection.