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(Prepared by Tony Graff, Retired City Manager, 1/6/07)
The entitlement process is for the property owner to petition/apply to the municipality for annexation and zoning with a concept land use as the entitlement exhibit. The due diligence cost runs around $1,000 to $1,400 per acre. Furthermore, combining the entitlement process with a listing agreement will ensure a full package service for the landowner.
Example is 240 acre site (based on 2.0 DU/Acre = 480 units (this will assist with the calculation for engineering and land planning cost) $240,000 to $336,000. The bank will loan up to 50% loan to value of the land and at closing the bank will be paid similar to a balloon payment 5 - 7 yr balloon term. The funds can be drawn upon as needed so interest is leveraged over time. The added value to the property with entitlement is between 15% - 20% (gross) depended on the location and market conditions.
The marketability improves in the eyes of the developers because they know the due diligence period has been completed. During the approval process the developer may submit the mass grading application. The next step is the final plat process which is more manageable and completed in a timely manner. This process gives the developer a comfort range on the known tangibles and more confidence, plus the farm family/property owners usually have a history as long standing citizens who are recognized within the community, placing a familiar face, like a neighbor, throughout the entitlement process working with staff and elected officials.
There are minor risks involved however, the risk out way with the property owner receiving control and the added value to their property with a potential net gain of 10% - 15%. I know a lot of the land contracts over time provide for an escalation clause, but I believe time has value and managing the land deal are all positives for the right type of land owner who was at the mercy of the developer, City/Village process or the scope of the contract they made 2 years ago. I believe managing time offers a better scenario for the 1031 exchange process. Another advantage to developers is the downsizing of land acquisition staff and the unexpected market conditions reduce their risks with a known commodity of entitlement.
Here is an investment analysis sample:
240 acre Farm with the current raw land sale price $30,000 x 240 = $7,200,000
Additional per acre cost of $1000 - $1400 = $240,000 - $336,000
Added (gross) value is 15% - 20% = $34,500 - $36,000 A/C
240 x $34,400 = $8,256,000 (added value of $1,056,000 - $288,000 entitlement cost (average) = $768,000 net gain of 10%)
240 x $36,000 = $8,640,000 (added value of $1,440,000 - $288,000 entitlement cost (average) = $1,152,000 net gain of 15%)
The investment analysis is conservative addressing the investment net gain. I believe the net gain could be between 20% - 30%. Any questions, or if you need to set up a meeting to discuss this process, contact me at 630-688-9217 or graffmd@aol.com.
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