Land Banking: Solid Investment Strategy or Gambit?

March 25, 2024

Land banking is a common practice in the United States. It’s when a buyer purchases land, hoping that its value rises in the future. It's also not just limited to real estate investment firms. Individuals, corporations, conservation groups, and government agencies land bank for different purposes, ranging from profit-driven development to conservation efforts.

California, with its diverse landscape, is especially ripe for land banking. It presents opportunities for land banking in areas with potential for agricultural expansion, renewable energy projects, or natural resource extraction. Investors may purchase land to mitigate the environmental impacts of development elsewhere. In urban areas, developers and investors often engage in land banking to secure parcels for future development projects, given the high demand for residential and commercial real estate.

While purchasing and holding property may seem low risk, especially if the cost is low, land banking can carry a variety of risks. These include the risk that the property is never developed or needed, and the value never rises. Or the cost to hold and maintain the property may eventually excess the value. Government policies may limit the property’s use through changes in zoning laws, land use restrictions, and infrastructure requirements.

And then, of course, are the potential environmental liabilities. In Part Two of this post, we’ll look at how land banking turned one of our client’s potential investments into a truly scary situation and offer some thoughts on how people might avoid facing similar problems.