On this episode of the FortuneBuilders Real Estate Investing Show, Jeff is joined by Patrick Christy from Equity Street Capital. They discuss the necessary process of gaining city approval for real estate deals. Tune in to hear Patrick discuss his area of expertise when it comes to the entitlement process and asset management.
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The Entitlement Process
Hey, everyone, welcome to this week’s episode of the FortuneBuilders Real Estate Investing Show. Jeff Rutkowski here excited for another great episode, I have an incredible guest, Mr. Pat Christy in the booth. I’ll give him a formal introduction here in a moment.
Word of the Week
Let’s start it off with our Word of the Week. The Word of the Week this week is entitlements, and entitlements in the context that we are talking about today, this is in the context of ground-up commercial development: apartment buildings, an office, you name it. To simplify it, I’m a simple guy. I like to think in simple terms here. It’s really the process of gaining city approval for a project, obviously, in certain states that can be very, very rigorous. In other states, still a little rigorous, but there’s a long process that needs to happen with city approvals and all of that before you ever put a shovel in the ground and that project gets underway.
Building on Raw Land
We have a ton of students in our community that always expressed interest in development. On the residential side, CT Homes does a fair amount here in San Diego as well, and Equity Street is doing a lot of great things there. You identify a piece of land. I would say that would probably be step one, right? You identify the market first. Walk us through that. What would be step one, step two, or step three, of taking a raw piece of land to the point where you can start building.
Depending on where you are, your city or state can be very different. And the timeframe can change dramatically. Yeah, here in California and a number of cities, it is a very long process. It is that’s for sure. it can start with kind of the pre-acquisition due diligence time. Yeah. So we can look at a property here in San Diego and say right now, it’s a single-family home, or it’s a large backyard. So it’s a pretty quarter of an acre to large size. But it’s right near a transit station, a new trolley station that just popped up, right?
Well, the first thing we’d look at is the zoning. What is it currently zoned? Well, there’s been a lot of changes. We have huge housing shortages in California. Sure do. And some cities, not all, but some cities are trying to encourage more development on the housing side and residential side. So maybe the zoning has changed. So keeping up with one of the things that I tried to do is keep up with what is happening in City Hall.
There’s a lot going on in terms of rezoning sometimes up zoning, and increasing the density of an area. So this land was single family for 40 years, it was a single home with a very large backyard. The trolley station was just built across the street. Maybe they’ve changed the zoning. And so it’s something for us to look at because there are other opportunities for that land.
The city would say that nowadays instead of one single-family home maybe you can build a three-storey residential apartment building and you can fit 18 units on that land. Keeping track with that. Before we buy something, double checking and see what that zoning is, so we can get a better understanding of well, is this the maximum height Max utilization for this land? That’s kind of part number one, which is the due diligence. acquisition time.
When you get started in real estate, one of the first things on your checklist is to get yourself a zoning map of the areas you’re going to be investing in. And like Patrick just said stay up to date on those zoning laws, just because a lot of times you could put yourself at a disadvantage, if for instance, here in Pacific Beach, where we currently are, there’s these three to 1200 square foot homes on a lot.
If you look through the lens of fixing and flipping maybe you pay 12 or 13. But for instance, just the other day, there’s one under contract for one nine, and I talked to the edge, I’m like, wow, that’s really high, well, actually, you can knock it down and build six units on it, right? So things like that. If you’re not really understanding how to maximize every piece of land, and what the maximum potential is, you could be getting outbid on a lot of stuff. Would you agree with that?
Absolutely. And, to that point, sometimes, it’ll help explain why a price is what it is. That’s a great example, one nine, suddenly, when you’re seeing it’s an outlier, once you have a one to one nine, suddenly is a different ballgame. And you might not understand you’re gonna miss out on the bid there, because you’re not sure kind of why that price is what it is.
Absolutely, absolutely. So you identify a piece of land, and you understand what that maximum potential is. And then you pull the trigger, you lock up the land, you make a decision, I’m going to build six new homes, I’m gonna build a 250 unit apartment bill, whatever it is, what do we do next?
The design process can be pretty substantial. So finding an architect or civil engineer to understand kind of what you can build out of the full dimensions. Once you start in that process, you also start working with the city. In lot of cities, you can set up initial consultations and a 15-minute conversation just to say, look what are my ideas?
Yeah, it’s kind of the building department is zoning department. Typically, a combination of the two said, we have the planning development, which is kind of the initial high level. So you’re not so the idea is to just talk very high level. My math is telling me I think I could build six apartment units here. Is that what the city is seeing? And they can tell you, yeah, the zoning currently says you can do this, you might have to remember this, you’re not getting into the detail of the kind of building construction. It’s more of a high level and cities I think are very helpful in terms of that information. That’s kind of the initial consultation.
And at that point, maybe they say they look at it, and they say, Okay, this is zoned for XYZ. And as a matter of you can do this here but how do you make the decision? So let’s just say it’s not a matter of right. And there would be a need for a variance or something required to maybe or maybe potentially apply to get it rezoned? What’s the thought process there at that point?
It can change depending on the type of project you’re looking at. Because zoning change, a variance can be a time-consuming process and expensive process. One of the things that you generally don’t want to take a big risk in terms of banking on a change in zoning because some places are just not very accepting of changes. It could be the neighborhood around you that could cause an uproar that says, people might not want very high density, because there are single-family homes around you. So I always think it’s helpful to kind of do some homework if you are anticipating a change in use of any type and to really understand if anything like that been done.
“Precedents are important. Just because you can get an idea. You can track projects around you can see what was built.”
You can understand if there was a planning commission hearing before you go to city council. That’s public information. You can go and you can see kind of what was discussed what was what did the public report say? Was there an environmental assessment? What are the challenges? So depending on the size of your project, you might want to do some of that kind of background due diligence just to really understand what type of risk Am I taking? Am I willing to change for sure? Because sometimes, if there are some deviations, maybe it’s a setback in the backyard. Sometimes you can get around that all by doing certain other things. And so kind of just understanding that is really helpful to the process.
Entitlement Process Time Frame
When we’re talking about the entitlement process, and getting ready to develop, or we’re talking longer periods of time we’ll just have like a one to a six, for instance, start to finish. What do you think is your ballpark? What do you think you’re looking at there, to put a shovel in the ground or tear down the existing structure?
It can take a year to two years, right here in San Diego right now, in terms of getting kind of a residential project approved? I’d say it’s a minimum year period, but it’s generally closer to the two-year period.
So what do you say to the person that a recessions coming, real estate’s a big bubble, it’s gonna pop. You’d be crazy to lock something up when you don’t know where the world and the market are going to be in two years. What are your thoughts on that? That’s a big topic of discussion right now all across the country.
I think one of the benefits of the entitlement process is that when you go in, the upside isn’t going to happen overnight. It is a process. If there is an economic slowdown, sometimes this allows you to kind of overcome and because you have to take some time to get it approved. It takes time to build something. You might outlast some type of economic pullback in that circumstance. You’re looking at a longer term investment because of the process. It’s going to take some time. If it’s a bubble, if it’s not a bubble, because you’re looking at one or two years plus construction, you’re looking at a longer period of time that will outlast knock on wood, hopefully, any type of slowdown that occurs. I think it’s still a great opportunity if you can find the right value add or outright value opportunity.
We’ll definitely get back here soon. Thanks for coming on. And thanks, everyone for joining us. As always, definitely like the video, subscribe, and do all that stuff. It just helps us fulfill our mission of reaching more people with financial education. We’ll see you next week on the FortuneBuilders Real Estate Investing Show. Take care.