Guide to the Entitlement Process for Land Development Projects
Identifying Risks and Strategies for Mitigation When Purchasing and Developing Unentitled Land
Investing in and developing unentitled land can be one of the riskiest yet most rewarding endeavors in the commercial real estate space. The entitlement process, in particular, is fraught with the potential for setbacks and even failure, all while significant money needs to be invested long before any revenue can potentially be earned. Given these risks, developers must be extra vigilant to try to identify, anticipate, understand, and plan for various problems that can occur throughout the process.
In this article we will provide a broad overview of the entitlement process, discuss major potential risks, and wrap up with some tips and strategies for mitigating these risks.
Entitlements: A Broad Overview
Although the exact steps vary by jurisdiction, the typical entitlement process usually requires a developer to submit a formal proposal, conceptual design package, and various environmental and technical studies to the local planning department in order for the project to be:
Assuming the project successfully makes it through all of the above, it should receive a final approval from the local board of supervisors or city/town council.
Entitlement Risks and Challenges
Process risks: A major responsibility of the planning department is to review project-specific technical and environmental studies to evaluate impact on the local environment and population. These studies are conducted by independent consultants paid for by the developer and look at issues such as air quality, transportation, wind, shadow and noise. Any one of these studies may uncover problems that could jeopardize the project's feasibility or delay the process for months or even years before being resolved. For example, a wind study might uncover the creation of hazardous wind conditions at ground level. Although this might seem like a trivial and easy problem to mitigate, in at least one case I am aware of, the condition was so severe that a 40-story building was completely redesigned to resolve for the hazard, adding significant cost and time to the process.
A proposed project will also need to make its way through other agencies outside of the planning department for further approvals. Typical agencies that might require separate review are the local utility providers, fire department, parks and recreation department, local public transportation provider or the mayor's office. Any one of these entities could hold up the process or challenge the project for various reasons.
Other process-related risks to consider are potential code and zoning violations missed during the design study, planning staff capacity and experience, and legislation that may go into effect during the process and negatively impact the project.
Political and community risks: In most jurisdictions, the board of supervisors or city council will have the final vote to approve a project based on the recommendation of the planning department and subsequent input from the local community. As elected officials, individuals on these committees pay close attention to their constituents, who may have strong opinions about the project. If a project is perceived to impact the community negatively, challenge their political goals, or fail to provide enough public benefits, the supervisors could pose significant challenges. They may cause delays, seek alterations to the design, or even try to stop the project from happening outright.
A recent example of a worst-case scenario outcome for a developer and land owner wanting to sell took place in Seattle, where there was a plan to demolish a cherished local music venue , the Showbox, to develop a residential tower. Opposition grew, with a petition that received almost 100,000 signatures, and famous Seattle rock icons taking out advertisements in the local media to call on local politicians to preserve the theater. Despite the site being zoned for high-rise development and the city facing a housing crisis, the Seattle City Council found a way to halt the process temporarily while they look for ways to prevent the development. The situation has become extraordinarily challenging and the ultimate fate of the project is still unknown.
Assessing and Mitigating Risk
To help you better prepare for a successful entitlement process or help you assess whether a project is worth the risk, time, and money, here are some tips to keep in mind:
1. Mitigation Strategies for Process Risk
Select qualified groups with strong local experience and great reputations among those that decide the fate of the project. Your land use attorney, environmental consultants, and engineering team should fit this description. These are “high touch” positions with city officials, and having them already familiarized with the people and process should provide an advantage.
Create a detailed, step-by-step timeline to outline how the entitlement process works in a particular municipality.
If you have the resources, it's advisable to consult with a local land use attorney and ask that they either produce or review this timeline. Unless you have developed in this municipality before, there can often be unknown processes that might not be readily apparent upon doing the research independently. For example, there may be an environmental approval requirement by an agency other than the planning department that is not easily identifiable. Getting to the end of the process only to find out there is another study required that takes four months to complete could be extremely costly. Additionally, this exercise can help in setting deadlines and expectations, as you will understand the minimum time involved for processing documents, as well as when particular hearings are scheduled over the year.
Understand what can be built as-of-right on the site and what, if any, exceptions you are seeking to develop the project.
As you develop your plans, your team—including you, your architectural and engineering team, and your land use counsel— will start to identify any areas of the program or design that would require an exception. Are the desired exceptions minor or major challenges to the entitlements process, and what is the path/process to gaining approval for these exceptions? Any missed exceptions will most likely be caught later by the planning department. Try to be as thorough as possible in your review so you can avoid unwanted news about an additional major exception late in the process from the planners.
Identify all costs required for entitlements.
These costs can usually be obtained from the local planning department, and can be anywhere from thousands to hundreds of thousands of dollars. Again, consulting with a local land use attorney can streamline this process and help you avoid any surprises.
2. Mitigation Strategies for Political and Community Risk
Research and understand the needs, desires, and vision of the city, town, and/or district. Is there a general plan, district plan, or any other development plan in place? Review all of these documents for important goals and objectives, and make sure your project meets or exceeds them if possible.
Who are the major politicians and community groups that can, and most likely will, influence the outcome of the project? Identify and familiarize yourself with them to determine how you may be able to work with them or seek their support for the project. Spend some time strategizing about how and when is the best time to reach out, if at all, and refine the message you want to deliver.
As an example, if your project is proposing significant community benefits, you may want to schedule a presentation to a prominent local community group first to give an overview of the project and highlight the benefits being proposed. If the meeting goes as anticipated, a wise next step might be to set up an appointment with relevant city officials to introduce the project and relay the feedback received from the community group.
Lastly, review all the documents and press from similar projects—approved, delayed, and rejected—in the same municipality. The closer these were to the project site, the better. Even better would be to network with these developers to learn about challenges they faced.
In conclusion, addressing and understanding the above information is critical to help analyze and sensitize the various scenarios that could play out during entitlements. Successfully navigating this process and receiving entitlements should, in most cases, substantially increase the value of the land without doing a single physical improvement. With risks and time associated with entitlements removed, the land is now "shovel ready" for the project to commence.
About the Author: Michael Belasco
Michael Belasco has a decade of real estate and construction experience. He currently works on large-scale, mixed-use development projects in San Francisco for Hines, a global real estate investment, development, and management firm with over $116 billion of assets under management.