Wikipedia.org: “Land banking is the practice of purchasing land with the intent to hold on to it until such a time as it is highly profitable to sell it on to others for substantially more than was initially paid. Land is becoming increasingly popular as an investment due to the benefit of it being a tangible asset as opposed to Shares or Bonds. This type of investment has gained such popularity it is now possible to land bank worldwide and there are several firms set up to offer opportunities to do so.
Parcels of land desirable for “Land Banking” are those that lie directly in the growth path of rapidly developing cities. The initial goal is to buy undeveloped land that will increase in value because it lies in the path of urban growth. The key is to identify these parcels well in advance of the developers and wait for their values to mature. With diligent research, financing and managing of a land banked property, one can realize a [potentially] handsome profit upon the sale.
Land Banking primarily focuses on the purchase of strategically located raw land in the path of development.”
Typically these types of investments were outside the reach of individual investors. In the past Land Banking was only within the reaches of:
- Pension Funds/Institutions
- Large Corporations
- Developers/Home Builders
- Wealthy Families
Now Land Banking is within the reaches of individual investors.
Typical land owners sit on raw land and sell for a profit in the future, however there are other steps beyond ‘sitting on land’. These other steps are known as entitling or zoning the land prior to developing the land for commercial or residential use. It is laborious and lengthy process whereby the land bank company must meet with state and local municipalities create and provide detailed schedules and obtaining the proper permits to entitle the land or zone. During this process attorneys, architects, landscape architects, surveyors, civil engineers, geotechnical and environmental consultants and site development contractors must be consulted.
The typical entitlement process can take anywhere from 1-2 years before any piece of dirt is ever moved. And this is where the most profits are realized since the average investor does not have the finances, resources, and time to take raw land to the next stage.
Since raw land does not for the most part generate cash flow, any gains are deferred until the land is sold is typically taxed at long term capital gain rates (investors should seek their own tax and legal counsel).
There are typically 4 stages of Land Banking:
- Acquisition of strategically located raw land:
- Conduct research prior to acquiring land
- Syndication of strategically located raw land:
- Invest in a LLC that purchases the land
1. Land Planning:
Development Feasibility Study:
- Perform preliminary studies to assess land use and intensity of future development on the land
- Regional servicing and infrastructure requirements are outlined
Master Plan Preparation:
- Prepare a conceptual Master Plan showing land uses, street layout and conceptual layout of necessary infrastructure
Planning and Zoning Approvals/Subdivision:
- This will permit the division of the lands into lots or blocks suitable for sale for residential or commercial developments
2. Exit Strategy:
- Land Banking companies arrange for the sale of lands to developers.