What Is a Covered Land Play in Real Estate?
Explore covered land plays, a real estate investment strategy balancing immediate income with long-term development value.
A covered land play is a real estate investment approach where an investor acquires land with an income-generating property. This strategy is designed to provide immediate cash flow from the existing structure, which helps offset the costs associated with holding the land, while simultaneously positioning the investor to capitalize on the land’s future development potential.
Understanding a Covered Land Play
A covered land play involves purchasing land for future redevelopment, but with an existing income-generating structure. This income “covers” holding period expenses like property taxes, insurance, and maintenance. The existing property (e.g., older commercial building, retail strip, parking lot) provides a financial cushion until new construction.
Investors acquire underutilized land in a desirable location with potential for higher use. They target sites where current zoning or market conditions may not yet support the ultimate development vision, but are anticipated to change. The interim income stream allows for patience, enabling them to wait for market appreciation or regulatory approvals.
This strategy contrasts with buying vacant land, which incurs carrying costs without revenue. An income-generating asset on site reduces the financial burden, making covered land plays attractive for securing prime development sites without immediate development pressure.
Existing improvements are temporary, serving their purpose until the larger development project proceeds. The value of the investment is primarily tied to the underlying land and its future development capacity, rather than the current income stream from the existing property.
The Dual Asset Structure
A covered land play has a unique dual asset structure: underlying land and an existing income-generating property.
The future value of this land is tied to its potential for rezoning or securing entitlements for higher-density projects (e.g., mixed-use, multi-family, commercial centers). The investor’s long-term vision drives acquisition, anticipating substantial value increase once development rights are secured or market conditions improve.
The second component is the existing interim income-generating property. This could be an older retail building, office complex, or parking lot providing cash flow. This income offsets holding costs, including property taxes, insurance, utility costs, and maintenance. It acts as a financial bridge, minimizing the financial drain before the land is ready for its ultimate development.
Investment Strategy and Returns
A covered land play requires a long-term strategic outlook. Investors typically hold the property for several years (usually three to ten), patiently waiting for market conditions to mature or necessary development approvals. During this holding period, the interim income from the existing property manages the investment’s cash flow by contributing to net operating income (NOI), covering recurring expenses, and reducing the need for additional capital. This makes the investment more financially sustainable, avoiding negative cash flow common with undeveloped land.
The ultimate return on a covered land play is realized through the capital appreciation of the land. This appreciation stems from factors like increased property values, zoning changes permitting higher density, or successful acquisition of entitlements for a more valuable development. For instance, a permit for a 20-story residential building on a site previously zoned for a two-story retail structure can increase the land’s market value.
Upon the eventual sale of the redeveloped land or the land with secured entitlements, investors typically incur long-term capital gains tax liabilities on the profit.