FEATURE ARTICLE, OCTOBER 2006

TAKE IT TO THE LAND BANK
Developers may find land banking as an option to keep tabs on future sites.
Matthew L. Adler

Will Rogers once said, “Buy land. They ain't making any more of the stuff.”

The concept of land speculation goes back much further than Will Rogers. For generations, entrepreneurs have attempted to identify the next area of growth years before development begins. 

Land banking is the act of purchasing land strictly for the future with no immediate intent of development. A land bank simply put is the institutionalization of land speculation.

Residential developers have been banking land for many years. They buy hundreds to thousands of acres of land with the anticipation that growth will allow them to develop housing communities there in the future. More recently, select commercial developers have attempted to bank commercial land. The theory being as the residential growth continues, commercial development is sure to follow.

Growth is occurring throughout the Southeast but nowhere is growth more evident than in Florida, where more than 1,000 people on average move to the state every day. According to the U.S. Census Bureau, Florida’s population was nearly 17.4 million in 2004, with a projected surge to 24.4 million by 2020 and 30.1 million by 2030. Florida is not only home to millions of consumers, it is also the future home of millions more; this new population is hungry for new places to live, shop and eat.

A commercial developer looking to bank land will analyze the residential growth and target key sites in the path of future development and traffic patterns. Clearly, developers need be cognizant of the local governmental bodies and their planning process. The major advantage a land banker would have over a traditional developer is a significantly expedited closing. Banking land at this early stage entails considerable risk but the potential rewards can be great.

A land bank fills an important niche in the development process. Historically, retail developers have demanded long investigatory periods before they place substantial dollars on the line. The developers use this time to get governmental approvals and sign leases with retailers, thus curtailing much of their risk. This often creates an impasse with the land owner who often is not a real estate professional, rather an investor looking to cash out in relatively short order. By banking the land, a developer is buying the site at a considerably earlier point in the process; therefore taking more risk, but ideally achieving a better price from the seller.

In fact, some retail developers are looking to land banks as a financial mechanism to acquire properties. These developers may have identified sites but do not have the capability to carry them for the required time in order for the area to mature. A land bank can acquire the site, and in exchange for the lead on a particular piece of property give the developer a “right of first refusal” or a “purchase option”.

A land bank can also provide a service to residential developers. Home builders often have sizable commercial parcels within their development plans. Typically, they wait until near completion of their community to either sell off the commercial sites or develop it themselves. A land bank can facilitate the purchase of commercial parcels from residential developers notably earlier in the development process. This would potentially allow the residential developer to free up capital and transfer the risk to another entity.

Though individual investors have speculated on commercial development sites for years, the act of doing this on an institutional or fund level is innovative. Most commercial developers or investors do not have the passive capital required for this type of investment. Although a new concept, commercial land banks are playing an important role bridging the gap between land sellers and developers. As growth continues in Florida and around the Southeast the concept of buying commercial land years before development will continue to become more prevalent.

Mathew L. Adler, executive vice president of Adler Group, is the founder and manager of the company’s Florida Retail Land Bank.


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