Land Banking

Land banking is the practice of dividing a tract of undeveloped land into small plots and selling them to individual investors on the expectation that the land will rise in value when development permission arrives. The UK's Financial Conduct Authority, which has published more directly on the model than any U.S. regulator, describes it plainly: "Land banking companies divide land into smaller plots to sell to investors, with the expectation it will rise in value once it's available for development." The buyer generally acquires either the plot itself or an interest in an entity holding it. What the buyer does not acquire is any control over, or entitlement to, the planning decision the whole case depends on.

The asset and the thesis are two different things, and only one of them is being sold. The asset is undeveloped acreage, worth whatever comparable raw land in that area is worth. The thesis is that a planning authority will rezone it, or that a developer will want it, at some unspecified future date. Nothing in the purchase transfers any right to that outcome. The FCA's consumer page is direct about how often the outcome does not arrive: investors "are told they will make big profits on small plots of land once planning permission is granted or development started", but "permission is often not granted or even applied for, and investors are left with land that is practically worthless", and the land is frequently "in areas of natural beauty or historical interest, with little chance of it being built on". The same page declines to condemn the whole category, noting that "while not all land banking schemes are a scam, it is often not made clear that there are restrictions on the development of the land or that it is protected."

The markup is the part a buyer cannot see. Because raw land has no quoted price and each parcel is unique, the price a buyer pays reveals nothing about what the seller paid. In 2012 the Securities and Exchange Commission sued Louis Schooler and Western Financial Planning Corporation, alleging that Schooler "buys raw, undeveloped land in the southwest United States, then sells the land at grossly inflated prices to general partnerships comprised of numerous unsophisticated investors", and that the defendants did not disclose the markup. The complaint's example was land in Stead, Nevada, allegedly bought for $1.85 million in 2010 and sold to investors in units valuing the land at approximately $9.3 million, which the SEC described as about a 500 percent markup. Those are allegations in a complaint rather than findings, and no outcome is asserted here; what the pleading illustrates is the mechanic, which is that the seller's cost is the single most useful number in the transaction and the one least likely to be disclosed.

When plots become securities. A straight sale of a parcel of land to a buyer who then owns it outright is a real estate transaction. But land banking is often structured with pooling: investors buy units in a partnership or company that holds the land, and the promoter manages it. That structure can convert the interest into a security under U.S. law, which is why the Schooler case was brought by the SEC at all rather than by a real estate regulator; the complaint alleged that the general partnership units "are securities in the form of investment contracts". Whether any particular arrangement crosses that line is the investment-contract question, and the security page covers the test. The UK regulator applies its own, differently worded collective-investment-scheme standard and notes that it can only act on a land banking scheme "when it is being promoted or operated as a CIS without our authorisation", adding that "it is possible to sell plots of land without the scheme being a CIS, so many land banking schemes are set up to avoid looking like one on paper." The two tests are not the same test, and neither one is answered by the seller.

Where the protection gap sits. The FCA states that "land investments are not regulated by the FCA", so UK buyers have no access to that country's ombudsman or compensation scheme. The U.S. gap is similar in effect but different in shape: a land sale that is not a securities offering falls outside the federal disclosure regime, so no registration statement, no audited financials, and no required risk disclosure attach to it. That is not a claim that such sales are unlawful. It is a statement about what a buyer does and does not receive.

The other land bank, named so it is not confused with this one. Many states authorize public land banks: government or quasi-government entities that take title to tax-delinquent, abandoned, or vacant property, clear the liens, and return it to productive use. Ohio's version is codified as the Land Reutilization Program in Chapter 5722 of the Ohio Revised Code, which defines "nonproductive land" and sets out how an electing subdivision acquires and disposes of it, and provides for county land reutilization corporations to act on a county's behalf. These are instruments of housing and blight policy. They do not sell plots to retail investors, and an offering that borrows the phrase is not connected to them.

A promoter buys a tract of undeveloped land, divides it on paper into plots or into units of an entity that owns it, and markets those to individual buyers. The pitch attaches a projected value to a future rezoning or development. The buyer pays, receives a deed or a unit certificate, and then waits. The land continues to be raw land, generating no income and often carrying property tax, while the buyer has no ability to advance the planning application the thesis depends on.

A hypothetical example of what the markup does to the arithmetic. Suppose a promoter buys 40 acres of unserviced land for $200,000, which is $5,000 an acre, subdivides it into forty one-acre plots, and sells each plot for $25,000. The promoter grosses $1,000,000 on land that cost $200,000, a fivefold markup, and every buyer holds an acre whose value as raw land is about $5,000 unless and until the rezoning arrives. For the buyer to break even, the land has to appreciate five times over before any transaction costs, and the appreciation has to come from a planning decision rather than from ordinary land inflation. That is the shape of the trade even when the seller is entirely honest about what the land is.

Three things are checkable before buying, and none of them requires trusting the seller: what the county's current zoning and comprehensive plan say about the parcel, whether any rezoning or development application has actually been filed, and what comparable unserviced acreage in the same area has recently sold for.

Pros

• The buyer holds a real, identifiable asset, and where the plot is deeded directly it is theirs regardless of what happens to the promoter.
• Land requires no maintenance, has no tenants, and cannot depreciate the way a structure does.
• If a rezoning does arrive, the change in value can be very large, which is the genuine basis of the appeal.

Cons

• The entire case rests on a decision by a planning authority that no seller controls and that is frequently never even applied for.
• Prices are set by the seller in a market with no quotes, and the SEC has alleged a markup of several hundred percent that was not disclosed.
• Raw land produces no income while it is held, and property tax and any association charges accrue against it.
• Resale is the hardest part: the buyer is a retail seller of one small unserviced plot, with no exchange and no natural buyer.
• Some plots are in protected or otherwise undevelopable areas, and the FCA notes those restrictions are often not made clear at the point of sale.
• Where the arrangement is a straight land sale rather than a securities offering, the federal disclosure regime does not apply.