Investing in and developing an unentitled site, broadly speaking, is one of the riskiest, yet rewarding, endeavors in the commercial real estate industry. The entitlement process, in particular, is fraught with the potential for setbacks and even failure, all while significant money needs to be spent and put at risk long before any revenue can potentially be earned. As such, development managers must be extra vigilant to try to identify, anticipate, understand, and plan for the numerous and disparate problems that can arise throughout the process.
Entitlements: A Broad Overview
Although the exact process varies in every jurisdiction, the typical entitlement process usually requires a developer to formally submit a proposed program, conceptual design package, and various environmental and technical studies to the local planning department so that the project can be (1) formally reviewed against in-place zoning regulations, the planning code, and local laws and initiatives; (2) tested to ensure there are no major negative environmental impacts (3) reviewed by other relevant city agencies for sign off and approvals, and (4) socialized with the local community to gain feedback and receive buy-in and support. Assuming the project successfully makes it through all of these processes, it should receive a final approval from the local Board of Supervisors or City/Town Council.
Entitlement Risks and Challenges: Process, Politics, and NIMBYism
A major responsibility of the planning department is to review project specific technical and environmental studies to better understand the impacts to the local environment and population. These studies are done by independent consultants paid for by the developer and look at issues such as air quality, transportation, wind, shadow, and noise. Any one of these studies may uncover problems that could jeopardize the project’s feasibility or delay the process for months or even years in order to resolve. For example, a wind study might uncover the creation of hazardous wind conditions at ground level. Although this might seem like a trivial and easy problem to mitigate, in at least one case I am aware of, the condition was so severe that a 40-story building was completely redesigned to resolve for the hazard, adding significant cost and time to the process.
A proposed project will also need to make its way through other agencies outside of the planning department for further approvals. Typical agencies that might require a separate review process are the local utility providers, fire department, parks & rec department, local public transportation provider, and the mayor’s office; of which any could hold up the process or challenge the project for various reasons.
Other process related risks to think about are potential code and zoning violations missed during the design study, planning staff capacity and experience, and legislation that negatively impacts the project that may go in to effect during the process, among others.
Political and NIMBYism Risks
In most, if not all, jurisdictions, it is the Board of Supervisors, or City Council, that will have the final vote to approve a project based on the recommendation of the Planning Department and input from the local community. As elected officials, they pay close attention to their constituents who may have strong opinions about the project. If a project is perceived to negatively impact the community, challenge their political goals, or fail to provide enough public benefits; the supervisors could pose significant challenges; causing delays, seeking alterations to the design, or even outright rejecting the project.
A recent example of a worst-case scenario outcome for a developer and land owner wanting to sell took place in Seattle where there was a plan to demolish a cherished local music venue to develop a residential tower. Opposition grew with a petition that received almost 100,000 signatures and famous Seattle rock icons taking out advertisements in the local media to call on local politicians to preserve the theater. Despite the site being zoned for high-rise development and the city facing a housing crisis, the City Council found a way to temporarily halt the process while they look for ways to permanently prevent the development. The situation has become extraordinarily challenging and the ultimate fate of the project is still unknown.
NIMBYism (Not In My Back Yard) is a term used for people who are vehemently against any new development in their neighborhoods, towns, or even cities. Developing in a strong NIMBY community can create tremendous delays and headaches as active and organized NIMBY groups will use whatever resources available to prevent or delay the approvals.
The above is by no means an exhaustive account of risk during the entitlement process. And as you can imagine, it is not uncommon for projects to be delayed or completely derailed through this process.
Assessing and Mitigating Risk
Based on lessons learned through my own experiences as well as from others, I’ve compiled a few important tips and questions to consider that can either (a) help you better prepare for a successful entitlement process or (b) help you assess whether a project is worth the risk, time, and money:
1. Team selection
If possible, try to select qualified groups with strong local experience and great reputations among those that decide the fate of the project. More so for some roles than others, but generally speaking; your land use attorney, environmental consultants, and engineering team should fit this description. These are high touch positions with city officials and having them already familiarized with the people and process should create an advantage throughout the entitlement process.
2. Create a detailed, step by step timeline to outline how the entitlement process works in a particular municipality.
If you have the resources, it would be preferable to consult with a local land use attorney and ask that they either produce or review this document. This is important because, unless you have developed in this municipality before, there can often be unknown processes that might not be readily apparent upon doing the research independently. For example, there may be an environmental approval requirement by an agency other than the Planning Department that is not easily identifiable. Getting to the end of the process only to find out there is another study required that takes four months to complete is something that could be extremely costly. Additionally, this exercise can also help in setting deadlines and expectations as you will understand the minimum time involved for the processing of documents and when particular hearings schedules are held over the year.
3. Identify all costs required for entitlements.
These costs can usually be obtained from the local planning department and can be anywhere from thousands to hundreds of thousands of dollars. Again, consulting with a local land use attorney can streamline this process and help you avoid any surprises.
4. Understand what can be built as-of-right on the site and what, if any, exceptions you are seeking to develop the project. Are the desired exceptions minor or major challenges to the entitlements process and what is the path/process to gaining approval for these exceptions?
As you develop the program and conceptual design; you, the architectural & engineering team, and your land use counsel will start to identify any areas of the program or design that would require an exception. Your attorney should be able to give you input as to the proposed strategy and risk of the exceptions being sought. Any missed exceptions should be caught later in the process by the planning department. Try to be as thorough as possible in your review so you can avoid unwanted news late in the process from the planners about an additional major exception needed.
5. What are the needs, desires, and vision of the city, town, and/or district?
Is there a general plan/district plan/other plan? Review all of these documents for important goals and objectives and make sure the project meets or exceeds them if possible.
6. Who are the major politicians and community groups that can and will most likely influence the outcome of the project? When to reach out and what is the message.
Identify and familiarize yourself with these people and see how you might be able to either work with them or seek their support for the project. Spend some time strategizing about how and when is the best time to reach out, if at all, and what is the message you want to deliver. As an example, if your project is proposing great community benefits, you may want to schedule a presentation to a prominent local community group first to give an overview of the project and highlight the benefits being proposed. If the meeting goes as anticipated, a valuable next step might be to set up an appointment with relevant city officials to introduce the project at that time and relay the feedback received from the community group.
7. Review all the documents and press from similar projects, both approved, delayed, and rejected, in the same municipality. The closer to the project site, the better. Even better would be to network with these developers to learn about challenges they faced.
Addressing and understanding the above information is critical to help analyze and sensitize the various scenarios that could play out during entitlements. Successfully navigating this process and receiving entitlements should, in most cases, substantially increase the value of the land without doing a single physical improvement. With risks and time associated with the entitlement process removed, the land is now shovel ready for the project to commence.
About the Author: Michael Belasco has over nine years of real estate and construction experience. He currently works for a global real estate investment, development, and asset management firm in San Francisco managing large scale development projects in the city. Michael has both an MBA and Master in Real Estate with a concentration in Real Estate Finance from Cornell University.