What is Land
Land is real estate or property, minus buildings and equipment, that is designated by fixed spatial boundaries. Land ownership may offer the titleholder the right to natural resources on the land. The traditional school of economics dictates that land is a factor of production, along with capital and labor. The sale of land results in capital gain or loss; under IRS tax laws, land is not a depreciable asset, and qualifies as a fixed asset instead of a current asset.
BREAKING DOWN Land
The term land can be looked at in a number of ways, with its definition viewed differently depending on the circumstances under which it is analyzed. The basic concept of land is that it is a piece of earth, namely a piece of property that has an owner.
A more delineated concept of land, the legal concept of land, is that it is a factor of some form of production, and though it is not consumed during this production, no production would be possible without it. Land is, therefore, a resource with no cost of production. Despite the fact that land use can be altered from less to more profitable, its supply cannot be increased.
Characteristics of Land and Land Ownership
In terms of being an asset, land includes anything that is on the ground, which means buildings, trees, and water are a part of land as an asset. The term land is inclusive of all physical elements, bestowed by nature, to a specific area or piece of property. This includes environment, fields, forests, minerals, climate, animals and bodies or sources of water. There is a wealth of natural resources that may be present on a property or piece of land that the owner, or titleholder, may be entitled to. This includes plants, human and animal life, soil, minerals, geographical location, electromagnetic features, and geophysical occurrences. Depletion of various natural resources in the United States, specifically natural gas and oil, is of great value, and drilling and oil companies, in many instances, pay landowners substantial sums of money for the right to use an owner’s land to access such natural resources, as well as shell out small fortunes for large acreages of access, specifically if the land is rich in a specific resource.
Lenders are extremely attracted to land because it is one of the oldest forms of collateral and because it cannot be moved, stolen, wasted or destroyed. Air and space rights are also covered by the term, meaning all air and space above and below the property is part of the term; however, the right to use the air and space above land may be subject to height limitations dictated by local ordinances, as well as state and federal laws.
Investing in Land for Development
Land’s main economic benefit is scarcity. Many investors who purchase land do so with the intent of developing it, often for real estate, such as commercial or residential developments that are subject to zoning ordinances. Investing in raw land can produce significant future cash flows that are easy to predict once secured, but developing land can be very costly and uncertain. Associated risks can stem from taxation, regulatory usage restrictions, leasing and selling the associated land, and even natural disasters.