What is Land Banking?

In most countries, land is a hot commodity due to sprawling cities and commercial development. Open land is often consumed at a dizzying rate by cities and developers hungry for space to build more housing, retail and office space. In anticipation of future development, investors and city, county or state governments may purchase and hold land that is vacant, rural or underutilized at a relative bargain before its value skyrockets once it eventually falls in the path of development. This practice is called land banking.

When land banking is used by a city or county government, or even a not-for-profit agency, it is typically to retain some control over the future development of a particular area. Some cities have been particularly aggressive in keeping suburban sprawl at bay, and use land banking to preserve green space, or to halt growth altogether. Land banking may also be used for cities and counties to exert control over how the land is developed, by controlling if it is zoned for commercial or residential use. They may also stipulate to future developers that some or all of the land be used for low-income housing.

Land banking, when used by cities and governments, may also be a benefit to future buyers by holding skyrocketing land prices at bay. It also gives these agencies the ability to build new schools, parks and other city projects on land that may become too expensive for a tight city budget, but are necessary for expanding cities.

Land banking is a practice also utilized by private investors who take a risk on what is usually cheap, undesirable property in the hopes when the growth comes to them, they’ll make a significant profit. Donald Trump, Howard Hughes and Bob Hope are all famous land bankers, buying up large swaths of land in what are now highly lucrative areas such as Manhattan, NY, Las Vegas and Southern California.

For many private individuals, no matter how cheap the land, they may not have the capital necessary to participate in land banking. Many land banking scams have sprung up, especially in the United Kingdom, to appeal to these investors. These involve land banking companies that buy up large areas of land, and divide them up into smaller, affordable plots. Unfortunately, the investor may be purchasing land that may never be developed due to zoning restrictions or other limitations.

If you are investigating land banking, research zoning laws, and visit your city or county planning department to see if there are any future plans for the area. Although Mark Twain gave the sage advice to “buy land, [because] they’re not making it anymore,” land banking is not guaranteed to be a lucrative investment.