Land basis: option and entitle, or buy the entitled site at a premium

juniper, the thing your 70 percent framing leaves out is that entitlement risk isn't only binary approval or denial. Most of the pain I've read about is partial approval. You asked for 96 units and got 74, or you got the units and a condition requiring a traffic improvement that costs $600k. So it's not a coin flip on a fixed prize, it's a distribution of outcomes and the bad tail isn't zero, it's a deal that pencils at half the return.

Working through licensing right now and one thing that surprised me is how much the answer depends on the jurisdiction rather than the deal. Some places entitlement is a staff-level administrative approval if you meet the code, some places it's a discretionary political process with a hearing and neighbors. Those are completely different risks wearing the same word. Anyone quoting you a general premium for entitled land is averaging across both.

You can price it, roughly. Take your fully entitled pro forma, run it as if approval landed, and call that value V. Your all-in entitlement spend is S, and the time cost is your carry plus what your equity would want for eighteen months of doing nothing. Then the raw land is worth something like probability times V minus S minus carry, less whatever risk premium your capital demands for a binary outcome. Do it and you'll find the implied discount is much steeper than the 40 percent you guessed, because equity charges heavily for outcomes where they can lose the whole basis.

That's why option structures exist. You pay a small nonrefundable fee to control the site and only spend the entitlement money in stages, with the ability to walk after each. It caps your loss at what you've spent to date rather than at the land price. The real question in path one is whether your option period is long enough for the actual approval calendar in that jurisdiction, and whether the seller will extend for a fee if the hearing slips. Most sellers underestimate that calendar as badly as buyers do.

On path two, the premium you're paying is only real if the entitlement transfers cleanly and hasn't started running out. Approvals expire, and expiration and extension rules differ by state and by municipality, so read the actual approval documents and conditions before you price anything.

sextant's staging point is how I'd think about it. In the service business I'm building, the work that gets paid reliably is the early feasibility work, precisely because developers want to spend $15k to find out whether to spend $200k. Geotech, wetlands delineation, a utility capacity letter, a zoning opinion. Those come first for a reason. If the sewer capacity letter comes back bad you've saved yourself the whole 19 months.

Running a small team on the service side, the thing I'd add is that the entitled site you buy at a premium often comes with a design somebody else optimized for their cost structure and their capital. I've seen approved plans that assumed a unit mix nobody wants now, or a parking count that costs a fortune to build. Changing an approved plan can put you back in front of the same board you were trying to avoid, depending on how the approval was conditioned. So check what you can modify administratively before you pay for certainty you don't actually have.

I'll bring numbers and let people tell me what's wrong with them. On a deal I looked at last year, raw land was $1.1m, the entitled comp down the road had traded at $2.4m. Entitlement spend to get from one to the other was maybe $250k to $400k depending on how contested it got, plus twenty months. So the market was pricing roughly $1m of value for $350k of spend and twenty months of risk. That's about a 65 percent chance of approval breakeven if you're indifferent to time and risk, and nobody is.

Which told me the entitled sites were cheap relative to the raw ones, or that the raw seller was dreaming, or that the entitled comp had something in it I couldn't see from the outside. cobalt's point makes me think it was the third one. I passed on both and I still don't know which of those it was.