Site Selection, Feasibility, and Entitlement
Real estate development is the process of creating new value by changing land use — converting raw land to improved property, repositioning an underutilized property, or constructing new buildings. The development process follows a structured sequence, though each phase introduces risks not present in stabilized property investing. Site selection and feasibility: the developer identifies a site based on market demand analysis (is there absorption for new apartments, retail, industrial in this submarket?), location fundamentals (access, visibility, infrastructure, proximity to demand generators), and purchase economics (can the site be acquired at a price that leaves sufficient margin after development costs for the project to pencil?). A back-of-envelope feasibility model calculates the residual land value: what the finished, stabilized project would be worth (Gross Development Value, GDV = stabilized NOI ÷ exit cap rate) minus all development costs (hard construction costs, soft costs, financing costs, developer profit margin) equals the maximum supportable land acquisition price. Entitlement is the process of obtaining governmental approvals to develop a property as planned — zoning approval, conditional use permits, environmental review (CEQA in California, NEPA for federal nexus), design review, and subdivision approval if required. Entitlement risk is the most consequential risk in development: approvals may take 1–5 years; neighbors may oppose the project (NIMBY opposition); conditions imposed by the jurisdiction may make the project economically infeasible (required affordable units, traffic mitigation, infrastructure contributions); and political changes in local government can reverse previously friendly zoning. Developers price entitlement risk by optioning land (paying a small option fee for the right to purchase the land if entitlement succeeds) rather than purchasing outright — this limits capital at risk during the entitlement period.