Preparation for an increasingly difficult approval process for development projects will be essential for land developers to maximize success.

The maze of community, county, and state regulations is getting longer and more confusing for land owners, engineers, architects, and developers. The increasing regulation needed to support evolving social, environmental, demographic, and economic values will force developers to change the way they acquire, finance, and develop their land. Most importantly, the actions of regulatory agencies will directly influence the future potential value of your projects.

With that hypothesis it is time to take a good hard look at where and how your organization creates value along the development lifecycle. Take a second to analyze this simplified flow of the development industry and pinpoint where along this chart your organization’s core competencies rest. Are they in the acquisition and assemblage of underutilized land? Are they in the preparation for vertical construction? Do they support developers in certain aspects of this lifecycle? Do they encompass the entire value-chain? Your actions or services add value as you move along this lifecycle through asset appreciation, repositioning, construction, economic rents, transactions, etc. It is also important to recognize the impact external influences have on the addition, or detraction of value to your projects along this continuum. These evolving influences will only become more complex over time, particularly in the “Project Design and Entitlement” stage of the value chain.


Convergence of Forces
Multiple sources of influence, each with various demands, needs, and requirements have converged on the land development industry to fundamentally change the way we receive and secure development approvals. These changes have revealed themselves in the concerns of developers and builders across the country. Residential developers perceive entitlement and regulatory issues to be one of their largest concerns.

Force #1: Organized Activism. From an activist standpoint, citizens who have historically acceded to the decisions of local and regional regulatory officials now seemingly challenge them at every turn. Organized campaigns crafted by neighborhood or special interest groups can force officials to risk their office on every vote, no matter how reasonable a development application may be. From angry neighbors to prepared activists, groups opposed to developments are frequently issuing press releases, retaining attorneys and raising money for lengthy court battles. National publications are showcasing articles on how to best organize to fight developers. The December issue of Worth magazine highlighted a cover story on strategies to combat developers intent on developing on parcels adjacent to established communities.¹  In Tiburon, California, wealthy local residents have come together with enough legal firepower to oppose Habitat for Humanity’s plan for needed affordable housing for teachers and low-income earners in an area where multi-million dollar homes are the norm². In Monterey County, California, a highly organized grassroots organization called LandWatch has influenced legislation establishing urban growth boundaries and actively challenges the rezoning of agricultural land to residential and commercial uses. Their lawsuits opposing subdivisions have held up city and county approved development applications for over six years— and the cases aren’t even settled yet.³

Force #2: Demographics. By 2040, America’s population will increase by an additional 83 million people. Concentration of this growth will center on resource-constrained metropolitan areas adding to existing traffic and infrastructure woes. According to the Brookings institution, by 2030 nearly half the buildings in the U.S. will have been built after the year 2000, and residential development is leading the trend. Exurbs (suburbs at the fringes of metropolitan areas) are growing faster than any other kind of community today according to census data. What policy makers are concerned about is that this growth is now occurring in areas without the infrastructure or experience to deal with it.

Force #3: Zoning and Code Updates. To combat these possible consequences of growth, regulatory agencies have instituted urban growth boundaries, comprehensive planning campaigns, and urged the use of “smart growth” initiatives. While growth management practices are nothing new, the degree by which land use regulation is being implemented is unprecedented in the United States. Take Loudoun, Virginia, the nation’s fastest-growing county in the last five years as an example. Its population has tripled in 15 years to a quarter million residents and put a large constraint on area resources, decreased air quality and the affordability of homes. Land use experts claim that there is only one solution: heavy regulation. Regulators are calling for smart growth zoning coupled with dense, mixed use developments to preserve open space, constrain urban sprawl and meet the area’s surging housing demand.⁴  

Force #4: Affordable Housing. Additional housing demand has and will continue to be met with new stipulations and regulations that call for affordability components. In fact, most Smart Growth planning reforms adopt the goal of increasing housing affordability and diversity.⁵ Consider this: in South San Francisco, California, a developer must provide at least 20% affordable units in a residential development exceeding five units. The affordable units must be directly comparable to market-rate units. “Affordability” rates are determined by the median income of the city and county at the time of construction. This means that if the median income of the area calls for an “affordable” unit to be sold at $300,000, the developer must make at least 20% of the units available at or below this threshold in spite of the fact that average hard costs per unit can exceed $400,000 for even a modestly sized unit. The premise of the problem is that not enough low-cost housing exists, particularly in the shadow of the recent housing boom. The policy response in most states has been to subsidize rental housing development, or mandate percentages of for-sale units to be sold below market as in the above scenario. The net affect is that the costs of affordable housing requirements are borne by the land owner, developer, builder or some combination thereof.

Force #5: Environmental Awareness. Growing environmental awareness is demanding greater due diligence and analysis of a project’s potential impact on the surrounding infrastructure and ecosystem. Municipalities are expanding their requirements for studies of biological, cultural, anthropological, and specie history specific to your properties. National policies also directly influence environmental studies. For example, the Environmental Protection Agency (EPA) recently heightened standards required for Phase I Environmental Site Assessments to include “all appropriate inquiries” in order to comply with the Comprehensive Environmental Response, Compensation and Liabilities Act (CERCLA) guidelines. While the modifications by the EPA might seem minor and provide additional insurance for your projects, the anticipated cost increases between $2,000 and $5,000 per study⁶ can add up quickly when simultaneously evaluating multiple projects.

Without a doubt, environmental awareness, environmentally sustainable development trends, and “green” practices have dominated the recent trade headlines. From complying with EPA guidelines to applying for and Leadership in Energy and Environmental Design (LEED™) certification standards, there is an underlying, unspoken assumption that we are moving from: ‘Every developable structure could have a green component,’ to, ‘Every structure should incorporate sustainable practices in its design.’


A Cause for Crisis?
Increasing regulations to meet social and environmental demands will increase both costs and time frames for development approvals in the planning and entitlement phase. Should these factors be cause for alarm? Let’s analyze their immediate time and cost implications for acquiring and developing land.

From a valuation standpoint, any additional regulatory and/or social, economic or environmental constraint can be a multiplier of time and risk. While it is sometimes difficult to quantify such perceived constraints, it is necessary to evaluate the added time and risk as it pertains to the structure of your deal’s acquisition criteria.

Specifically, your due diligence must contain a laundry list of potential added cost for your project budget. Will community opposition require additional legal firepower? Will you require a substantial marketing campaign to garner influence for your project? What environmental reviews will be necessary to demonstrate the project’s feasibility? More importantly, how long will these reviews take? At what cost? How will the application time frame affect the potential carrying cost for your project?

In a changing regulatory environment, many builders overlook the cost of obtaining approvals. What demands will the process make on your organization’s time? What is your opportunity cost if the project takes 12 extra months to entitle in an area that is a four hour drive away from your office? Does obtaining entitlements steal time away from what you do best? If your organization specializes in preparing infrastructure necessary for the vertical advancement of a development, you have a staff and crew on hand to eventuate this process. Your business is physical site preparation. Getting bogged down in the regulatory constraints of passing an application could significantly detract from this competency.

More than anything, added regulation brings uncertainty to the entitlement process. Perhaps the largest potential impact occurs when regulators institute policy with little awareness of the regulations’ impact on the developer’s financial calculations. This is not just by happenstance. According to the American Institute of Certified Planners (AICP), development finance is one of the most overlooked skills needed for planning today⁷. It’s not that planners don’t understand finance; rather, planners emphasize local, county, or even national policy to the extent that they often don’t consider the financial impact on developers.

Affordable housing requirements, development impact fees, higher permit fees, special impact fees and the like are often based on the assumption that developers have the resources necessary to consistently meet evolving policy. In reality, policy forces developers to continually reinvent mechanisms by which to cut costs. In the past, these costs could come out of the underlying price of land, or through increased densities, and not be passed on to the end customer in the form of heightened asset prices. Unfortunately, speculation in raw land by hedge funds, foreign investors, institutional investors, and players with little previous development experience has pushed land values into the stratosphere^8,9, thereby placing serious constraints on future development profitability through added competition.


An Economy Unto Itself
There is a flip-side to that coin: if there is one thing that added regulation gives us besides longer entitlement time frames, it is uncertainty in receiving intended approvals. Where there is uncertainty in an economy, there is a chance for arbitrage and opportunity.

While the challenge for receiving entitlements will increase, so too will the rewards. Where it once took mere months to receive approvals for a project, it might take a year or two. The difficulty for receiving entitlements will commensurate with the added value of the property upon approvals. The trend will be that value will increase significantly for paper approvals. This means that by obtaining tentative maps, planning commission approval, city approvals, or the equivalent (even without necessary building permits), the value of land will be substantially increased, and not just due to land appreciation over time.

The land value added through navigating a proposed plan through government municipalities will vary directly with the time it takes to receive entitlements. The industry’s value chain will become much more specialized. After all, if an organization concentrates on vertical construction, why spend time, money and resources on application approvals when the time cost could justify the purchase of entitled dirt? Builders will increasingly move away from raw land acquisition and instead more frequently push toward the purchase of entitled and/or improved land so as to speed up their time to market for a finished product.

Other segments of the industry will also emerge to capture the value of land through re-entitlements. For example, the remodeling or retrofitting of existing buildings to comply with LEED specifications will have a substantial impact on our industry. In fact, restoration of older structures is the fastest growing portion of the development market today¹⁰.


Brace Yourself
Paper value of land will constitute a significant portion of the estimated $25 trillion¹¹ land grab over the next 30 years. Strategies for obtaining approvals, and thus the increased land value, will be of utmost importance. Again, we come back to the core competency of your organization. If your competency includes receiving the necessary government approvals for a development, brace yourself for added regulation and social pressures. Outsourcing of the entitlement process is a growing trend throughout regulation heavy states such as California, Oregon and New York. This niche opportunity will only expand in other states as development constraints mount.

Due diligence must also be re-defined to include sustainable design parameters, the time cost of money, financing, the involvement of stakeholders and transparency with entitlement officials. Underlying contract negotiations on a development parcel must take these evolving factors into consideration.

Finally, to promote communication with all stakeholders of a project, think like a planner. Research the trends. Immerse yourself in planning publications and up-to date topics that are hot buttons for city, county, regional and state regulators. Organizations such as the AICP provide a wealth of up-to-date information on development trends from a planning perspective.

In the meantime, brace yourself for the coming entitlement boom. As the conflicting needs of the political, social, demographic, economic and environmental influences mount, there is bound to be uncertainty and volatility. For those who know how to navigate these waters, a wellspring of opportunity awaits. SLDT

¹ Worth Magazine, CurtCo Robb Media, LLC, December 2006.
² Ritter, John, “Affordable homes draw flak in Marin,” USA Today, 2/19/07.
³ www.landwatch.org.
⁴ Davenport, Coral, “In a fast-growing county, sprawl teaches hard lessons,” The Christian Science Monitor, 1/23/06.
⁵ Staley, Sam and Gilroy, Leaonard, C., “Smart Growth and Housing Affordability: Evidence from Statewide Planning Laws,” Reason Foundation Policy Study No. 287, December 2001.
⁶ Jayne, Roxanne E., Esq., “EPA’s Final AAI Rule – More Bang for the Bucks?” Land Development Today, November/December 2006.
⁷ American Institute of Certified Planners: 2007 Training Guide: www.planning.org.
⁸ Roney, Maya, “Overseas Investors Still Find US Property Hot,” Business Week.com, 2/14/07.
⁹ “Builders on the Block,” The Economist, 3/31/07.
¹⁰ Kirk, Patricia, “Designing the Way to Green,” Urban Land, November/December 2006.
¹¹ Kaihla, Paul, “The $25 Trillion Land Grab,” Business 2.0 Magazine, 11/1/05.