Land Banking as a Retirement Strategy

“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” -Franklin D. Roosevelt

A good retirement investment policy is to roll your IRA into real estate. As the stock market heads south, rolling over a portion of your IRA into real estate could vary and lessen your risks. There can be tax profits in converting IRA funds from one kind of asset to another. Also you could roll your capital gains on the land into a future real estate purchase, avoiding the need to pay tax on the capital gains.

If you choose to invest your IRA into real estate, you will be responsible for a speculative investment. If you have selected your land well, you are bound to get quite good gains. Conversely, should the land never get planning permission for development, you could discover yourself sitting on an expensive white elephant. It is important that your due diligence is comprehensive.

Land banking, done the right way, has the potential to return higher-than-average investment gains in the long term. A land banking specialist can provide information about past returns and investment opportunities. However, there are risks involved in shifting from paper assets to land banking, and you should obtain professional advice to ensure that you are fully aware of the risks before making a decision to change your investment strategy.

Dutra.Cerro.Graden
Alan Cerro
22551 Second St. Suite 255
Hayward, CA 94541
(925) 250-4289 Fax: (925) 380-6718 
acerro@dcgdev.com web: www.dcgdev.com

What is LAND ENTITLEMENTS

Real Estate Dictionary: Entitlement–The right to develop land with government approvals for Zoning density, utility installations, occupancy permits, use permits, and streets.

In essence, Land Entitlement is what happens with a project before a shovel of dirt is turned.

Entitlements are the backbone of any development. Entitlements dictate “what, where and how much” can be built on a particular property. The “what, where and how much”—have a lot to do with determining the value of a property. A property that has a large number of uses is typically more valuable than the same property with a very limited use.

Entitlements are a legal agreement with the governing jurisdiction to allow a certain development to occur on the site. Entitlements outline the density, function and setback requirements allowed for the property.

Typically, developments can only be financially viable if they can obtain a certain density or usage. Entitlements are the key to legally securing this right from the governing jurisdiction.

When reviewing a development application, a jurisdiction will consider potential impacts such as traffic and environmental risks as well as community acceptance of the proposed development. They will likely require studies from the owner as well as proposed conceptual designs of the project.

Applying for entitlements is a challenging process. Depending on the size of the project and intended use, entitlements can take from a few months to many years to obtain. This is in large part based on the complexity of the project and public acceptance of it.

Dutra.Cerro.Graden
Alan Cerro
22551 Second St. Suite 255
Hayward, CA 94541
(925) 250-4289 Fax: (925) 380-6718 
acerro@dcgdev.com web: www.dcgdev.com

Where to Land Bank

Land Banking can be done with any undeveloped, pre-developed or undervalued land that is the path of development. Land values increase because of specific events such as rezoning or identification for future development of a school, church or residential community.  For this reason, the most successful Land Banking is typically accomplished by buying pre-developed land in the growth path of a major metropolitan area; holding it; and then selling it to a developer.

Location, Location, Location

Location is the key to a successful Land Banking strategy. Land Bankers typically do not develop the land themselves; instead, they reap the benefits of increased value as a result of market demand. Demand depends on the desirability of the location. Desirable land is often located close to business areas, growing residential areas, and transportation corridors. Researching local zoning designation, history and trends can provide invaluable information for predicting future growth trends.

The Path of Development

State, county/local governments and agencies designate specific growth paths, so that they can plan for future water, power and transportation needs. As cities expand, more land is needed for residential developments, industry and roadways. The direction of this growth indicates the path of development or growth. Land Banking along these paths typically yields the highest return for investors.

Research

The path of development is dynamic and depends on many factors. Land Banking Specialists can identify desirable land by looking at all the factors.  Some of the factors include demographic patterns, migration patterns, housing patterns, government regulation /zoning, economic growth patterns, environmental conditions/pressures, geographic considerations, and public/private investment patterns.  Land Bankers understand and even predict these variables through careful research.

A Focused Market

Because of the extensive and ongoing research required for successful Land Banking, many Land Bankers and support professionals focus on one specific market. Markets are identified by growth potential and past performance. Just as real estate agents become experts in a specific areas Land Banking Specialists get to know the particulars of a specific path of development.

Most experienced Land Banking Specialists use the “60 mile limit” rule as a guideline for determining the outer limits of a viable growth path from the centre of a major metropolitan area.

It’s Not the Price – It’s the Value

Return on investment is measured by how much your real estate investment increases in value. Land in some geographic markets might be more expensive than land in other areas, but buying cheaper land does not ensure a better investment opportunity. The value of the investment is driven by growth. Growth in some markets is significantly higher because of weather, government funding, demographic patters, and position within the global, national and regional economies. All of these are variables for the Land Banker to consider when buying land.

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How Land Banking Works

“More money has been made in real estate that all the industrial investments combined.
The wise young man or wage earner of today invests his money in real estate.”
– Andrew Carnegie

Land Banking can be understood very simply: buy low and sell high. Land Banking combines personal financial and investment goals with a significant understanding of the real estate market.

There are three basic phases to Land Banking: Planning, Accumulation (buying), and Distribution (selling). Each new purchase of a land asset follows this process. The first buy can be intense, but subsequent purchases leverage past experience, and comfort levels rise quickly.

As with any real estate purchase or investment decision, individuals may want to secure the help of a professional, specifically a Land Banking Specialist, to guide them through the Land Banking process.

Planning Phase
There are two aspects of the Planning Phase.  First, and most importantly, as a potential Land Banker you should understand how Land Banking fits into the goals and strategies of your personal financial planning. It is absolutely critical to understand when you will need liquidity, what risks you are willing to accept, and how land assets fit into your overall portfolio.

Second, as a potential Land Banker you should carefully research available land in your designated Land Banking area and then identify specific parcels for purchase. Most real estate investments companies that hold or sell land in desirable Land Banking areas will have a team of land acquisition specialists who have already done extensive research and prepared market comparisons on the entire land inventory.  Connecting with a Land Banking Specialist may save an individual investor hundreds of hours of research.

Accumulation Phase
During the accumulation phase an individual Lank Banker typically purchases and holds the land. They do not develop it. They do not use it for recreation. They hold it.

Individuals may use available cash or tap into their retirement portfolios to make an acquisition. There are a variety of legal structures through which land can be held to ensure taxes and management obligations are fulfilled.  A certified Land Banking Specialist can help you walk through this process.

Building one’s portfolio is the process of accumulating more and more land in a manner consistent with one’s personal financial goals. This may involve putting additional financial resources into Land Banking. It may also involve selling land and reinvesting the money into additional land.

Distribution Phase
Land is sold during the distribution phase – at the right time, at the right price, to the right buyer. This phase can be part of an ongoing accumulation – resulting revenue is reinvested into new land. It can also be the final stage – the equity is transferred into other investments which meet more immediate financial goals.

One of the key components of the Distribution Phase is the allocation of the proceeds from the sale of your land.  If the proceeds are not being used for ongoing Land Banking, it’s best to document a clear strategy on how to minimize your tax consequences and maximize your wealth or future income allocation by using tools such as 1031 exchanges.