Land Banking
Land banking is the process of purchasing and holding onto land parcels with the objective of future development or sale once the land appreciates in value. The concept leverages the understanding that while the immediate need or financial readiness to develop the land might not be present, strategic acquisition of land positions investors, companies, and developers to capitalize on future opportunities when the demand or value increases.
Detailed Explanation
Land banking differs from other real estate investments in that the land is often held in its undeveloped state for a prolonged period. Investors speculate that the land will appreciate over time due to factors such as urban expansion, infrastructure improvements, demographic shifts, or zoning changes. This strategy requires patience and a speculative mindset, as it may take several years or even decades for the land to increase significantly in value or for optimal development conditions to arise.
Examples of Land Banking
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Corporate Strategic Reserves: A fast-food chain like The Burger Company plans to expand its operations in the next 10 years. To ensure that prime locations are available when needed, Wendy Ronald, in charge of land banking for the Burger Company, acquires 8 plots of land spread across potential growth areas during the early stages, even though there’s no immediate need to develop them.
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Municipal Land Banking: A city government purchases vacant or underused land parcels in anticipation of future infrastructure projects such as public transportation expansion, community parks, or housing developments. By securing the land now, the municipality positions itself to influence development and meet future needs more efficiently.
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Real Estate Investment Funds: An investment fund focuses on acquiring large rural land tracts just outside a rapidly growing metropolitan area. Holding these parcels allows the fund to sell the land at a substantial profit to developers once urban sprawl makes the location desirable for residential housing or commercial properties.
Frequently Asked Questions about Land Banking
Q1: Why do companies participate in land banking? A1: Companies participate in land banking to secure land for future operations, act as a hedge against rising property prices, and capitalize on potential increases in land value as developmental trends shift.
Q2: What are the risks associated with land banking? A2: The risks include long-term capital lock-up, potential lack of liquidity, market and zoning changes that may devalue the land, and potentially high holding costs over extended periods.
Q3: Is land banking suitable for individual investors? A3: While it can be, land banking generally requires substantial initial investment, patience, and risk tolerance. It may be more suitable for sophisticated investors with significant capital and long-term investment horizons.
Q4: How does a land bank affect local communities? A4: Land banks can positively influence local communities by preparing land for beneficial public projects or reducing blight through strategic acquisition and redevelopment. However, land banking by private entities can also keep parcels out of productive use longer than desired if speculative hoarding occurs.
Q5: Can land banking be a part of a diversified investment portfolio? A5: Yes, as land can appreciate in value independently of traditional financial instruments. However, investors should be aware of the unique risks and lack of liquidity associated with land banking.
Related Terms
1. Real Estate Investment Trust (REIT): A company that owns, operates, or finances income-producing real estate across a range of property sectors. REITs provide all investors the chance to own valuable real estate and access real estate investment opportunities.
2. Zoning: Laws and regulations dictating how land can be used in specific geographic zones. Zoning impacts everything from building dimensions to the types and density of activity presented in any given area.
3. Land Value Appreciation: The increase in the value of a parcel of land over time due to various factors including developmental, economic, or market demand changes.
4. Urban Sprawl: The expansive and uncontrolled spread of development into regions adjoining urban areas. It’s often driven by population growth and the availability of cheaper land.
5. Speculative Investment: An investment with a high degree of risk where the focus is on significant return potential, but there is also a substantial risk of loss.
Online Resources
- Investopedia
- [National Community Land Trust Network](http://community land trust network.org)
- Urban Land Institute
- Government Accountability Office (GAO) Reports on Land Banking
References
- Smith, Wade. Land Investment 101: A Roadmap for Land Banking Strategies. Real Estate Press.
- Daniels, Thomas L., Daniels, Kaufman. The Promise of Land Banking. Island Press.
Suggested Books for Further Studies
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“Real Estate Investment” by David M. Geltner, Norman G. Miller, Jim Clayton: A comprehensive guide on different types of real estate investments including land banking.
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“The Land Development Handbook” by Dewberry: Provides insight into the land development process and includes practical advice on how to approach land banking.
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“Principles of Real Estate Practice” by Stephen Mettling, David Cusic: Covers the fundamentals of real estate, including strategic land acquisition and long-term holding.
