Here are my notes on where land value comes from in entitlement-driven development. I originally built a simple model to stress-test deals and figured others might find it useful.

Friends often send me links to beautiful pieces of land with prices that are too good to be true. I'm honored that people think of me when they see great land, but these conversations almost always go the same way. When we look into the zoning, it quickly explains the price: you're not allowed to build much on it. The land isn't "entitled."

Entitlement is the legal process by which raw land gets permission to be developed — in California, it's long, expensive, uncertain, and controlled by local governments. Cheap land is typically cheap because the market has priced in how hard it is to get that permission. The discount isn't a bargain; it reflects the work required to unlock the value.

But if you do succeed in entitling land for significant development, its value shoots up to reflect the new permitted supply.

I call this "entitlement alchemy". The dirt doesn't move, but the piece of paper saying "you may build here" can double the value overnight. In supply-constrained markets, permission to build is a huge portion of the asset's value.

Revenue
—
Total cost
—
Profit
—
Margin
—
carry_cost
—
IRR
—
50 1,000
The number of entitled units you can build — the single most important factor; if you can't build many units, the land is essentially worthless
$100k $500k
How much each entitled lot is worth to a buyer
$10M $200M
The cost of building the roads, utilities, and grading to make the land developable
$0 $80M
The price you pay for the land itself — often a smaller portion of total cost than the infrastructure
3% 20%
The rate of interest charged on the infrastructure loan
1 8
How long it takes to build the infrastructure and sell the lots, which affects both the IRR and how much interest you pay

This is a simplified model — it ignores all sorts of relevant variables like absorption pace, financing structure, product mix, etc. But it is useful for a first-order intuition about where value is created and which variables to stress-test when you're evaluating an opportunity.

1. Price-per-lot sensitivity is steep → you should over-invest in placemaking

Placemaking is one of the highest leverage things you can do for your bottom line. The slope of your profit line means amenity investments have massive leverage.

If spending an extra $2M on a town center, park, nicer streets, etc lifts price_per_lot by even $10k across 700 lots, that's $7M in additional revenue — a 3.5x return.

The way we think about this for Esmeralda is that making the village beautiful and loveable is not just the right thing to do; it's one of the highest-leverage things we can do for the bottom line.

Making the place you're building beautiful and lovable doesn't trade off against the returns — it amplifies them!

2. Fixed infrastructure cost → more units means more profit per unit

Much of its cost is fixed regardless of unit count — the roads, utilities, and grading don't scale linearly with each additional lot. This means more units not only increases total profit but also increases profit per unit, since total_infra_cost gets spread across more lots.

profit(N) = N * price_per_lot - total_infra_cost - land_cost

The slope is set by price_per_lot, and small changes here rotate the line a lot. The intercept is shifted down by total_infra_cost and land_cost, both of which are largely fixed, which is why it is so valuable to get more units.

The intercept between the black line and the x-axis represents the point where profit equals zero, indicating the minimum number of units that must be sold to break even on the infrastructure investment.

3. Infrastructure costs compound → accelerating absorption pays off the debt faster

If you’re using debt to fund the infrastructure, the carrying costs compound. A one year delay is economically equivalent to a meaningful increase in your infrastructure cost.

carry_cost = total_infra_cost * interest_rate * years

Because infra costs compound over time, maximizing absorption rate (i.e. getting revenue sooner to pay off debt) is very helpful. 

Investing in placemaking is a key lever for this, too.

4. Fixed infrastructure cost creates economies of scale & a moat for developers who have access to capital

The fixed infra cost means there's a minimum project scale below which nothing pencils. If roads + utilities cost $50M regardless, you need hundreds of units just to break even. This effectively locks out small developers and creates a barrier to entry purely based on capital requirements.

5. The model reveals why infrastructure phasing is so helpful

Rather than building all infrastructure upfront, phasing lets you spread that fixed cost across time — installing roads and utilities for Phase 1 only, then using revenue from early lot sales to fund subsequent phases.

By lowering your carrying costs, your debt clock doesn't tick on the full infrastructure cost from day one, which can make a huge difference for IRR and overall profitability.

Phasing also de-risks the project: if market conditions shift, you've only committed to a fraction of the total infrastructure spend.


I'm building Esmeralda, a walkable village in Sonoma County. Feel free to reach out if you're interested in learning more or getting involved!