Entitlement

In development, entitlement means the legal right to build a particular project on a particular piece of land. Land that is already zoned for what a developer wants to build, with no discretionary approvals required, is described as by right. Land that needs a rezoning, a variance, a special permit, or a negotiated approval must be entitled first.

Entitlement can be quick or it can take years, and the length is often unknown at the start. During that period the developer is spending money on architects, engineers, lawyers, consultants, and application fees, and is paying to hold the land, while receiving no income. These are carrying costs and soft costs, and both grow with time.

Entitlement risk is priced. A developer who buys land with no guarantee of approval pays less for it, because there is a real chance the project never happens. A developer who buys already-entitled land pays more. Either way, the cost and uncertainty of the approval process show up in the land basis and in the return investors require.

The reason it matters for rent is arithmetic. Assume a year of delay while $6,000,000 of land and soft costs sit invested at an 8% cost of capital: that is $480,000, or about $33 per unit per month on a 100-unit building, added to the rent the project needs. A slower approval process makes housing more expensive even if it changes nothing about the building.