Land banking fund pitch, 3 to 5 year target on an asset with a 15 year story
A sponsor I have been introduced to twice is raising for a land banking vehicle and I have the deck and a draft PPM on my desk. I have never put money into land and I am trying to work out where the mismatch is, because I can feel one.
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. 2 percent annual asset management fee on committed capital, 25 percent promote over an 8 percent preferred return, five year term with two one year extensions at the sponsor's option. No income at all during the hold, so the pref accrues and compounds rather than being paid.
Their track record is three prior parcels, all sold, average hold 4.1 years, gross multiples they show as 1.9x, 2.3x and 1.6x. Two were bought in 2019 and 2020.
What bothers me. The pref accrues, so by year five the sponsor is chasing a hurdle that has grown to roughly 1.47x of my capital before they see a dollar of promote, and the only lever they have to get there is selling. That makes an option to extend look less like patience and more like a sponsor who cannot hit the number. And a 2 percent fee on committed capital against an asset that produces nothing means the fee comes out of the sale or out of a reserve I am funding, either way out of my return. Eight to twelve parcels at $14 million with no debt is roughly $1.2 to $1.7 million a parcel, which in those corridors is not a lot of acres.
The track record is three deals bought at the bottom of a run that most land in those metros participated in.
What I have not figured out is what a fair fee load looks like on a zero cash flow strategy, and whether a five year term on land banking is just structurally wrong.