Aaron Dabbaghzadeh, InwestCo Founder & CEO, deciphers the ascendancy of Land Entitlement and Banking Groups in bridging the housing deficit.
With a staggering 45 million millennials now entering the prime home-buying age range of 30 to 40, the demand for housing has reached unprecedented levels. Unfortunately, at the same time, the nation is grappling with a severe housing deficit during this increased demand.
Experts estimate the deficit to be between 3.8 million to 6.8 million units, requiring a comprehensive approach to meet the need for homes. While President Biden’s target of 100,000 new homes is a step in the right direction, it looks to fall significantly short of addressing the magnitude of the problem.
I believe that focused efforts by investors can help the industry while boasting attractive advantages such as cash flow, appreciation, tax benefits, inflation protection, diversification and control. Through my time consulting investors, I have learned that many are not familiar with land entitlement investments. Therefore, I hope this article can help you understand some of its opportunities and how to add value through this process.
Impact Of Policy
Monetary policies wield an influence on the market, shaping factors such as borrowing costs and demand. However, the impact of the housing market on the increases in the federal funds rate has been relatively minor. This relationship is illustrated in Schiller’s Graph, which I believe underscores the need for concentrated investment endeavors to address the ongoing housing shortage.
Despite limited inventory, the increasing number of households is expected to mitigate the impact of higher interest rates and may lead to a shift towards smaller, more affordable housing units or renting.
It is important that national builders diligently monitor customer preferences and purchasing power and proactively integrate the influence of these trends into their development plans. Additionally, the two- to three-year lead time required for ground-up construction can give builders an advantage, especially considering the predictions of a Federal Reserve interest rate decline by 2024 or 2025.
Niche Markets Develop: Land Entitlement Groups
Overall, national builders face challenges in adding land to their balance sheets since corporate governance and guidelines can restrict them from exceeding agreed budgets even when regional sales are strong. A common practice to navigate this hurdle is to collaborate with land entitlement groups to secure pipelines for future projects.
Land entitlement groups are specialized entities that help transform raw land into a shovel-ready stage. This intricate process involves essential steps such as zoning, environmental review, obtaining use permits, building permits, utility approvals, road approvals and landscaping. I’ve found land entitlement groups to be an adept way to navigate these multifaceted procedures because of their expertise and strong collaborations with local planning commissions, city councils, engineers and public officials. Their focused approach tends to foster an intimate understanding of the geology, hydrogeology, demography and urban structure of the regions they operate in, making them invaluable contributors to successful development projects.
As a critical step before initiating any land acquisition, these groups conduct thorough evaluations, including extensive marketing research and feasibility studies. These evaluations are conducted closely with national builders and independent land acquisition managers (LAM) to ensure a comprehensive assessment of each project’s potential.
Due to their operations’ scalability and high profitability of the opportunities, land entitlement groups are typically seeking additional capital to expand their pipeline and market presence. This can entice investors with diverse investment opportunities such as funds with predetermined returns, preferred equity partnerships, convertible promissory notes and other alternatives.
When investing with land entitlement groups, you can use cash reserves or contribute from your retirement account. The advantage of contributing from your retirement account is that allocations do not constitute cash out, distribution or a taxable event and are therefore not susceptible to penalties.
Diverse Strategies
One of the essential approaches these organizations employ to maximize their return on investment is the simultaneous purchasing and selling of land. This move can enhance profitability and tends to limit their financial exposure to soft costs, ensuring a more secure and stable financial position.
With a keen eye on risk management, land entitlement groups employ other strategies to hedge their risk. An essential part of this risk mitigation approach is obtaining letters of interest (LOI) from builders involved in the project. This proactive measure helps ensure that builders fully commit to the project before any land acquisition is finalized.
Meticulous land purchase agreements (LPAs) that incorporate carefully crafted clauses help safeguard against setbacks or deviations from the original plan. This approach enables a straightforward withdrawal from the raw land acquisition, shifting the risk to the seller. The land is deemed “controlled” rather than fully “purchased” under the LPA, allowing flexibility in navigating potential challenges while securing entitlements.
Potential For Investors
Given the significant housing deficit and the high demand for affordable homes, I see the possibility for land entitlement groups to play a crucial role in the real estate market. Investing in these groups can contribute positively to this domain while securing a stable financial future.
However, as with assessing any investment opportunity, it is essential to recognize that each offer has unique structures. Therefore, you should conduct an exhaustive investigation to determine the best offering that meets your financial goals. This includes evaluating the firm’s reputation, analyzing historical performance and projected returns and assessing ongoing projects and pipelines. Additionally, consider factors such as taxation structure, management fees, annual operational expenses, redemption period and profit-sharing ratios.
By examining these aspects and making sure your situation reflects the optimal one I outline above, this can lead to potentially more successful and rewarding investment outcomes. Furthermore, you may benefit from seeking guidance from experts and consultants who have invested in this domain and are familiar with different frameworks.
In conclusion, the surging demand for housing and a severe housing deficit creates an urgent need for viable solutions. I believe that real estate investment has the potential to secure a financial future while also addressing the pressing housing crisis. The emergence of land entitlement groups as a niche market further reinforces the opportunity for targeted investments and the creation of affordable homes.
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