Land Contribution Deal
Need clarity on how to underwrite a land contribution deal. In the waterfall I know the current Land Owner contributes their land, but here are a few points I am tripped up on 1. Is the land they contribute counted as part of the budget I( know we can get loan proceeds on it, but I mean the actual development budget) 2. If not part of the budget when their contribution hits in the waterfall how does it offset the cash flow that needs to be paid out. It reduces the equity, but land contribution are not cash and you still need cash to offset your costs....so how would you model this would the sponsor put in all the equity then get reimbursed?
1) Yes it is still in the budget under your "land costs". youll just have a 1:1 value for equity of whoever contributed it.
2) Good question. Every deal is different. However I most see if structured that the pref rate/IRR hurdle is based on the total equity contribution..including the land value. Same goes for any pari passu splits. When it comes to return of equity...it really depends on the deal. More than likely it will be from a capital event i.e. a sale. In which case you WOULD be returned the value of the land even though it isn't cash. How else would it be treated? It's being sold, let's assume free and clear of debt, to the buyer. You no longer own it. However since you contributed 100% of it as your equity %...you get 100% of the proceeds.
Yes it is, it's tough to understand unless if you have seen the process firsthand, but typically the land is pegged to a value and the JOINT VENTURE closes on the land, NOT the Buyer or JV partner. For example, if the total development budget ("TDV") is $100M, the land is valued at $50M (for purposes of example), and the equity to debt is 40 (split 50/50)/60, then to fund the joint-venture the project needs $40M of equity or each partner needs to put in $20M to capitalize the equity portion of the project. The 'Developer' puts up $20 and the 'Seller' puts up $20, but they contribute the equity by kicking in a portion of the land value. So the JOINT VENTURE closes on the property for $50M, the Seller kicks in $20M of the 50M to fund the equity position, and then receives an additional $30M in cash from the joint-venture (of which they are indirectly paying a portion of it). On the flip side, if the land value is not enough to fund their position in the joint-venture, they will need to come out of pocket to fund the balance of their equity position.
I am not following 100%, but you're saying the sponsor puts up 100% of the equity but the land seller is still in the deal?
Yes I am saying Sponsor puts up 100% of the equity and then current land owner contributes their land, as a result whatever their land is worth in comparison to the total equity requirement is the percentage ownership they then have in the deal. I am just trying to find the most efficient way to underwrite this as I have seen it modeled different ways. For example...land contribution is a budget item, land contribution is not a budget item and returns are individual returns are further scrubbed in waterfall etc. What is the best pay to account for the land contribution in the model
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