Does anyone know, or have a good idea, about the difference in returns on entitling & developing the land for each scenario, with final objective to sell to a builder to build and sell the structures him/herself.  

Affordability is no more that $4500 per month  morthage/taxes insurance. 

What if they build just outside the city limits, so they are not paying city taxes?     

So you have LP who makes investment then when it does not go right has no clue what to do @Chris Seveney then points out not only did they get wiped out but if there is significant cost seg taken there will be some pretty hefty tax due and the LP did not know if there was a cost seg or not..

Do they include energy tax benefits within their study?

After this tax year, I will know exactly what I need to do to progress.

However, it must not have been your or their intention to avoid tax. 

Also the school districts have been increasing property taxes in A LOT of investment properties thus eating some of our profits. 

If your goal is cash flow, then your best bet may be to live in it for 2 years, and then take that tax free gain (250k single person, 500k married) and buy elsewhere. 

It is my understanding that people refinance and then use those funds other ways (personal living, investing, some to buy another property) as a means to minimize tax obligation.