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Can you clarify what you're actually asking for here? Land banking is literally just acquiring land and holding it for a future pipeline. There's nothing to model. If you like the dirt, price, and entitlement risk, you buy it and hold it til you're ready to build or the market is ready for you to build.
Do you mean a land development or single family/townhouse development model?
I do not mean any of the above. Public homebuilders 'Land Bank' their projects to boost return and keep the asset off their balance sheet. The land banker closes on the land and executes an option agreement with the builder where they can purchase lots back from them and charges a fee. I was curious if someone had a model that the land bankers use.
Have you not just described exactly what crenadian wrote?....
No.Land banking is used by public companies to acquire land without holding it on their balance sheet.The land banking lender technically owns the site. You put 5-15% of the cost to acquire the land and complete the horizontal as a "deposit". They then find 100% of the cost to complete the lots, and establish a contractual lot take-down schedule. If you default and fail to acquire the lots on the take down schedule, you "forfeit the deposit" and they still own the land.It's the same as an 85% loan, but you do not carry the loan on your books as technically, the land banker actually owns the fee-simple interest.These guys do it:https://www.gibraltarrec.com/financing-programs
Btw I am no expert, this is just my understanding. Please feel free to correct.
This is a pretty good explanation. My only clarification would be that in my experience, land banking usually refers to a bulk purchase of fully improved lots by the “land banker” who just carries them while the builder takes them down. No entitling or developing by the land banker, so they earn a smaller margin than a true dirt moving developer would. I’ve also seen it apply to a land banker who will hold entitled phases or pods of a large master planned community while the builder buys and develops individual phases at a time.
My key difference would be that the land banker really just carries the ground, they don’t develop.
OK, but irrespective of the actual mechanics (options, outright purchase etc) does it not just boil down to putting equity into land, maybe doing some zoning work, then finding a buyer. If you can model a "traditional" deal, you can model that.
Actual mechanics - It would have to be a takedown contract with a builder, an outright purchase would defeat the purpose of banking.
Equity into land - Yes
Doing zoning work - No, that’s moved out of land banking and into development work.
Finding a buyer - Usually a land bank play involves simultaneous execution of the underlying land contract and builder contract. The land banker is not speculating on future demand, they’re just providing balance sheet flexibility to the builder.
Modeling - Agreed that it’s pretty straightforward. My only guess is OP is confused about the builder’s deal structure.
Thanks for the explanation. Basically this is how it works:
The land banker closes on the land, and builder enters into an option agreement where they have the option to purchase back lots on a rolling basis once the horizontal improvements are completed.
The banker closes on the land and simultaneously the builder puts down a 15% deposit (of the land + Dev + interest costs or 'land bank margin') with the land banker. This amount is non-refundable if the builder is to back out of the option agreement and not take down the lots.
The land banker then hires the builder to develop the lots for them as the CM.
The builder then develops all the lots, and then starts to take down the lots they need based on their monthly sales pace.
The land + dev + interest rolls into each lot cost, and is what the builder pays at each takedown.
I guess my question is how to calculate the interest incurred, as it ultimately rolls back into the lot takedown price and is used for the deposit amount. Right now i am calculating the interest based on the outflows of the land banker and then reducing the amount by the lot takedowns from builder w/o the interest amount and deposit prorata share. I then am rolling that back into the lot takedown price and deposit amount in a iterative cacl/circular reference.
Is there a better way to do this?
I can’t share model but worked on a few land banking deals. You can model it like you would a loan.
what’s your structure like?
Structure is 15% deposit of total project cost (land + Dev + land Banker Margin/Interest). Interest/IRR is 12.5%. at each takedown we pay the lot cost minus the deposit reimbursement + interest/land bank margin cost.
So you're the builder here taking down the lots or was that just a phrasing issue?
Who's funding land development costs?
The model should look similar to a construction loan that gets periodical paydowns instead of a balloon payment at the end like a refi. So at the last lot buyback, your "loan" will be paid in full.
I was struggling a little with one where the interest is baked into each of the lot costs. 15% of total costs (land, dev, interests) down at COE, 12% interest, and then purchasing the lots at a fixed lot cost at each takedown.
The Adventures in CRE land development model is perfect for land banking analysis
Bump. I am evaluating a land (lot?) banking opportunity. The homebuilder has presented the following terms:
In reading a bit online, this seems fairly homebuilder friendly. I have a couple potential changes to these terms, but want to get a sense of whether this is "market" from anyone who is in the space:
Anything else that I'm missing?
I work on the homebuilding side. Ask for their current sales data. See if they are making healthy margins at a reasonable pace.
Shocked anyone can get land banking to pencil with these elevated land prices but kudos to you, OP. Generally, we would mirror a loan structure but swap interest for carry (depending how you structure your deals may not be applicable).
What about the land banking is difficult to pencil? From the home builder side? We are the land bank in the instance.
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