3.7 Entitlement Risk

Who are the primary players willing to take on entitlement risk in real estate?

What is entitlement risk referred to as in the UK?

In the US, what is entitlement risk called?

What is an example of entitlement risk mentioned in the text?

How do developers manage entitlement risk in relation to local authorities?

What method do developers use to mitigate entitlement risk by purchasing the option on buying land?

What happens to the land's value if planning permission is obtained?

How do developers reduce their risk when purchasing land with an option?

What do the strategies employed by developers demonstrate in managing entitlement risk?

What is the potential consequence if the local authority rejects the request for additional floors?

Managing Entitlement Risk in Real Estate

Entitlement risk is challenging to manage in real estate, and most investors avoid it.
Developers are the primary players willing to take on entitlement risk.
Entitlement risk in the UK is referred to as planning permission, and in the US, it is called entitlements.
An example of entitlement risk is a developer purchasing an office building in London with the intention of converting it into residential space and adding more floors.
The developer took the risk that they might not obtain permission to add the extra floors.
The local authority had the power to reject the request for additional floors, potentially resulting in a significant loss for the developer.
Developers manage entitlement risk by building relationships with local authorities and engaging in activities that may influence favorable treatment.
Another method to mitigate entitlement risk is for developers to purchase an option on buying land, paying a fee to secure the right to purchase the land at a set price if they obtain planning permission.
The farmer, in this case, receives the fee and agrees to sell the land at the set price if the investor achieves planning permission.
If planning permission is obtained, the land's value increases, and the developer can purchase it at the agreed-upon lower price, effectively reducing their risk.
Developers employ various creative methods to manage entitlement risk, requiring strategic thinking and innovation.
These strategies demonstrate how developers navigate and mitigate entitlement risk in real estate investments.

Test your knowledge of managing entitlement risk in real estate with this quiz. Explore the challenges, strategies, and examples of how developers navigate and mitigate entitlement risk, including planning permissions and engaging with local authorities.