What Is Land? Definition in Business, Valuation, and Main Uses

What Is Land?

Land, in the business sense, can refer to real estate or property without buildings and equipment that is designated by fixed spatial boundaries.

Land ownership might offer the titleholder the right to any natural resources that exist within the boundaries of their land.

In traditional economics, land is a factor of production, along with capital and labor. The sale of land results in a capital gain or loss.

Under Internal Revenue Service (IRS) tax laws, land is not a depreciable asset and qualifies as a fixed asset instead of a current asset.

Understanding Land

The basic concept of land is that it is a specific area of earth, property with clearly delineated boundaries, that has an owner. You can view the concept of land in different ways, depending on its context, and the circumstances under which it's being analyzed.

When one owns land, one owns the surface area and everything on it, such as trees, buildings, and animals. One also owns the area below and the airspace above its boundaries.

In Economics

Legally and economically, a piece of land is a factor in some form of production. Although the land is not consumed during this production, no other production—food, for example—would be possible without it. Therefore, we may consider land as a resource with no cost of production.

Despite the fact that people can always change the land use to be less or more profitable, we cannot increase its supply.

Characteristics of Land and Land Ownership

Land As a Natural Asset

Land can include anything that's on, under, or above the ground. This means that buildings, trees, and water that are a part of land are an asset.

The term "land" encompasses all physical elements bestowed by nature on a specific area or piece of property—the environment, fields, forests, minerals, climate, animals, and bodies or sources of water.

A landowner may be entitled to a wealth of natural resources on their property, including plants, human and animal life, soil, minerals, geographical location, electromagnetic features, and geophysical occurrences. 

Among the Oldest Types of Collateral

Lenders of money are extremely attracted to land because it is one of the oldest forms of collateral. And unlike a home or a car, land for the most part cannot be moved or stolen.

Air and space rights—both above and below a property—attach to ownership. 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.

Land Valuation

Land value is the amount of money that a piece of land is worth. This value can be arrived at by an independent real estate appraiser. Land valuation can be one of a variety of important indicators of a community's financial well-being.

Precise land valuation plays a role in various types of financial activities, including real estate transactions, local government taxes, and property investments. Land must be valued properly in order for these activities to occur and for buyers and sellers to have confidence in them.

Land valuation can also help landowners deal effectively with those who wish to enter a business transaction with them to make use of their land. Knowing the land value and the expenses associated with ownership (in addition to the type of use sought) can help the landowner pinpoint what to charge.

Factors Affecting Valuation

Land valuation can be affected by a property's location, climate, size, condition, the physical structures on it, the natural resources contained within its boundaries (such as the presence of water, minerals, or oil), and more.

For example, land near a city, public transportation, healthcare facilities, schools, supermarkets and other shopping, and a variety of other businesses as opposed to being far from such attractions can command a higher valuation.

That's because the location can make the land more appealing to those who might want to live in the house that's on it or to those who might wish to develop it for residential or commercial purposes. The greater the appeal, the higher the land's valuation could be.

As for natural resources affecting valuation, take gas and oil. Because natural gas and oil in the U.S. are being depleted, the land that contains these resources can be of great value. In many cases, drilling and oil companies pay landowners substantial sums of money for the right to use their land to access such natural resources, particularly if the land is rich in a specific one.

Land Use

Land use refers to the use of land by human beings for their business and cultural activities. Land's primary use is for residential, commercial, industrial, recreational, agricultural, and tranportational purposes.

Ongoing land use can affect the condition of the land, its natural resources, and the environment. These condition changes in turn can pose problems for the health of humans and other animals living on the land as well as the viability of the land itself. Agriculture and development uses are areas of concern for the U.S. Environmental Protection Agency.

Land use is governed by municipal regulations and local zoning laws. Town and city planners and other organizations focus on how land is used to understand the outcomes of such use. They can then provide guidance for its future use and potentially effect change in land use laws.

Investing in Land for Development

Land's main economic benefit is its scarcity. Many investors purchase land with the intent of developing it. Development can be for commercial or residential use and is subject to the aforementioned zoning ordinances and local regulations.

Raw land investments can produce significant future cash flows that are easy to predict once secured. But developing land can be very costly and uncertain. The associated risks of developing land can stem from taxation, regulatory usage restrictions, leasing and selling a property, political events, and even natural disasters.

The Bottom Line

Land is considered real estate or property defined by specific borders. It can serve a commercial purpose and be seen as a factor of production. And it can serve a residential purpose, supporting people with shelter and other buildings and attachments.

Investors may be interested in land for its development potential or the existing commercial activities taking place on it. Land development as an investment has its hazards due to the risks related to local regulations, taxes, political situations, and natural disasters.