Working through a land banking fund pitch with a five year term on a fifteen year story
Take a land banking vehicle raising on a deck and a draft PPM, aimed at an investor new to raw land. The mismatch is worth tracing carefully. Structure as pitched: $14 million equity, no debt, buying eight to twelve parcels of 40 to 300 acres in the growth corridors of two sunbelt metros. A 2 percent annual asset management fee on committed capital, a 25 percent promote over an 8 percent preferred return, five year term with two one year extensions at the sponsor's option. No income during the hold, so the pref accrues and compounds rather than being paid out. A track record shown as three prior parcels, all sold, average hold 4.1 years, gross multiples of 1.9x, 2.3x and 1.6x, with two bought in 2019 and 2020, near the bottom of a run that most land in those metros participated in. The structural tension: an accruing pref means that by year five the sponsor is chasing a hurdle that has grown to roughly 1.47x of committed capital before any promote, and the only lever to get there is a sale. That makes the extension option look less like patience and more like a sponsor who cannot hit the number on schedule. A 2 percent fee on committed capital against an asset producing no cash flow comes out of the eventual sale or a funded reserve either way, out of investor return. Eight to twelve parcels at $14 million with no debt works out to roughly $1.2 to $1.7 million a parcel, which in those corridors is not a large acreage per parcel. What is worth pinning down before committing is what a fair fee load looks like on a zero cash flow strategy, and whether a five year term is structurally mismatched to a land banking thesis that is really built on a longer horizon.
