The Entitlement Process: What Does it Entail?
What is an Entitlement?
An entitlement is simply “the process of obtaining a municipality’s legal approval to develop (or redevelop) a piece of real estate for a specific use”. An example might be obtaining approval to develop raw land into a retail shopping center or redevelop an old, abandoned tire manufacturing building into residential apartments. All municipalities across the United States control the legal use of the land within their jurisdiction and the process by which an investor can change the legal use of that land through entitlements.
Investors can go to a municipality or county website or speak with someone in their office to determine the current legally approved zoning for a specific property or piece of land.
The Entitlement Process
Let’s look at an example. Let’s say there is a piece of land within the city of Austin, Texas. It’s located in a section of town that contains mostly industrial and manufacturing properties and businesses. This subject land is currently zoned for commercial use, however, the land is on the outskirts of a part of the city that has seen increases in residential development due to recent population growth within Austin. A residential developer may notice that the subject land would be a great site to build residential apartment buildings that would accommodate the population growth, however, since the property is currently zoned commercial, they can’t simply develop apartments without changing the legally approved zoning.
Now this developer will need to work with the municipality through the entitlement process to have the property rezoned from commercial to residential use (each municipality has its own zoning rules and regulations) so that they can build residential apartments. The developer will typically need to work with a zoning and entitlement attorney to submit an application, engineering reports, architectural drawings and renderings, and supporting research and documentation on why this land should be rezoned from commercial to residential. The developer will also need to detail the potential benefits and drawbacks of this rezoning. The municipality will then need to weigh several factors including how the new development will impact the surrounding neighborhood(s), any potential environmental risks, changes in traffic, and community acceptance of the new project.
The entitlement process can be arduous and has the potential to take several years depending on the complexity of the project, such as pushback from the community and how backlogged the municipality is with other projects.
Following the Process
By going through the entitlement process and changing the zoning on a particular property to something that will have greater value, the property will typically appreciate in value. After the entitlement process, the developer has two options. First, they can sell the property to another investor who can then develop the land into the intended property. The property is typically sold at a premium since the new investor does not have to go through the entitlement process and can simply step in and start developing. Secondly, the developer can continue with the project and develop the property themselves.
The entitlement process can be long and scary, however, as macro events impact certain states and cities and neighborhoods change over time, investors are able to create value by developing and redeveloping commercial properties and the entitlement process is often the first step in putting these changes into motion.