In this post of the development overview series, we will explain entitlement.
In real estate development, entitlement refers to the development rights of a property. If a land owner wants a new use to be established, obtain variances from the zoning code, change zoning or the general plan designation on a property, then they will have to go through an entitlement or a discretionary approval process which means that the agency or jurisdiction does not have to approve it. On the other hand, for ministerial and administrative approvals you just need to follow the rules. An example of a ministerial approval would be getting a building permit. As long as you comply with the building code, you will get your permit.
An example of a discretionary approval is to change the zoning of a property from single-family detached dwellings to multi-family dwellings (apartments, townhouses or condominiums). In order to receive discretionary approvals, you will need to understand the desires and concerns of the agency, address them, and go through the public due process. Sometimes the process may be politically charged, as there may be conflicting desires and concerns from neighbors and other constituents. Therefore, the process can be long and arduous. However, once approved, the value of the land will be dramatically increased. In our example above, land zoned for multi-family residential is worth more than land zoned for single family homes.
In California, the Lead Agency must comply with the California Environmental Quality Act (CEQA) on all discretionary approvals. CEQA requires disclosure of environmental impacts associated with the proposed discretionary action(s) as well as mitigation measures to avoid or reduce any significant impacts. There are 17 categories that must be analyzed in the Environmental Impact Report (EIR). The reason for the CEQA analysis is to provide adequate information to elected officials so they can make informed decisions on whether or not a project should be approved based on its environmental impacts.
On the national level, an Environmental Impact Statement (EIS) may be required and is similar to the Environmental Impact Report (EIR).
The entitlement process can seem daunting but the financial rewards will correspondingly be high as this is a high risk and high reward business. In the event that one is not able to obtain the entitlements, the upside is that all is not lost. One would still retain value in the existing property unlike investing in startup companies where writing off the entire investment is a very real possibility if the company is unsuccessful.