Land Banking:
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:
- Governments
- 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).