Modeling Land Contribution as Equity in Dev

cpgame's picture
Rank: Neanderthal | 2,195

My boss always says it's beneficial to us as developers if land owners are willing to contribute their land into the deal as equity vs paying cash outright. Is there really any difference to project IRR and multiple whether the land is contributed or paid for (same month in both scenarios)? I would think total development cost would remain unchanged.

If I'm mistaken, can someone help me understand the intricacies of modeling the contribution as equity? I typically handle this on the waterfall tab and keep track of Land guys returns (and all other equity investors) once I've solved for the project level levered return prior to this point. If the land contribution DOES affect the project level IRR, then I'm certainly modeling the deal incorrectly.

Comments (7)

May 11, 2018

A few thoughts...if there is an equity raise fee, it will be lower as there will be less equity to raise via land contribution. Also, carry costs (pref accrual) will be held off if current owner holds land until shovel ready . There are intricacies here depending on circumstance, but these are some general items I can think of.

May 11, 2018

You give them a credit for a capital contribution (generally in your waterfall) but the deal does not have to pay for it. Will raise you deal-level returns and they get to participate in the deal rather than getting a chunk payment.

It sounds like you're doing it right.

May 11, 2018

So if I'm understanding you correctly, the total development cost would NOT include the land if it is contributed? I.e. the 55% LTC construction note does not calculate off a total cost that includes the land value?

Since equity goes first in the draws, wouldnt buying land outright vs it being contributed to as equity maintain the same equity total in either situation, and thus make no difference? If it's completely backed out (or omitted) from the project budget in the first place which you may be alluding to, I think I get it....

May 11, 2018

No you should still be able to get credit for the appraised land value when sizing the loan. In the bank's eyes contributing the land is just an equity contribution. So from a modelling perspective, add the land value to your total dev cost and apply your LTC to that sum to size your loan. But in your actual cash flow you don't run any land cost, thus reducing equity to close.

May 11, 2018

So where in the model would you "back the land out" so that the equity contribution doesn't completely fill the total equity amount, but only the total amount less: land?

Feb 5, 2020


I am trying to model the same and am struggling where to back out the land cost in the model... How did you manage to do it?


May 11, 2018