The exit discount clause in a land banking operating agreement can end up being the whole return

A common version, @stephen_ok9, has the exiting member pick from a list of three appraisers the remaining member proposes, which sounds backwards until it works. If the two land more than 10% apart, a third appraiser chosen by the first two breaks it, cost split, average of the two closest. In the case above it never got that far.

I move slowly on everything and this thread is a good argument for why. You had to double your carry with no warning and reach for a credit line. Before I buy anything with a partner I want to know what happens when they need money for a reason that has nothing to do with the land, because that seems to be the actual risk, more than growth going somewhere else. Did you and he ever talk about that in 2019, or did the attorney just put the clause in and you both signed?

Also, how did you decide you were funded through 2031 rather than 2027? Was that a number or a feeling?

The mechanism worth separating out here is that the buyout price and the market value of the parcel are two different numbers, and the gap between them comes from what the agreement says rather than from anything about the land. A marketability or minority interest adjustment reflects that a fractional, non-controlling stake in an entity holding illiquid raw land is harder to sell than the land itself. Whether a given adjustment percentage is respected in a dispute, and how it is treated for tax purposes on either side, depends on the agreement's language, state law on member remedies, and the facts of the exit. Both parties need their own counsel, and the tax treatment of a redemption versus a member-to-member purchase is a question for a CPA, since those two structures work differently. On the carry, @chriswalton8's post takes for granted that the remaining member can absorb the full tax bill and the buyout cost simultaneously for the rest of the hold. That is where forced sales come from in land banking. A parcel with no income has no internal source of funds for taxes, insurance if carried, weed or nuisance compliance, or special assessments if a district forms. Doubling an ownership share doubles all of it while the exit date stays exactly where it was. A useful test before signing any co-ownership on land: model the remaining member paying 100% of carry from year one of the buyout through the far end of the projected hold, then add a plausible tax increase from reclassification or reassessment. If that number only works with a credit line drawn, the buyout right is theoretical. Confirm current property tax classification rules and reassessment triggers with the county assessor in writing, since they vary by state and sometimes by county.

For an investor who wants income and no second job, this reads as a second job with negative income. Four years of paying taxes on dirt and then an emergency negotiation with a partner's divorce attorney in the background. The arithmetic clearly works out. The middle part is what most people underestimate, and it is worth being honest about whether you have the stomach for it before the operating agreement gets signed.

The discount deserves a push, because you are counting it as return and it is not one yet. You paid $132,000 for something appraised at $158,000. That $26,000 is only real if the parcel actually sells near appraisal, and the appraisal is on a thin comp set. Raw acreage at the exurban edge trades rarely, and the comps are probably a mix of acreage sizes with adjustments the appraiser guessed at. What was the comp set? If it is three sales in eighteen months across a wide radius, your $7,900 is a range with a $1,200 error bar in both directions, and the buyout was less obviously a bargain than it reads. Separately, the blended basis is a cost number and says nothing about the market. It only lands at $5,900 because the agreement's 20% adjustment priced his half at $6,600 an acre instead of $7,900. What the land itself did is the appraisal: $5,200 an acre in 2019 to $7,900 in 2023, about 52% over four years, roughly 11% a year compounded. That is at or above what a lot of people assume land does at the edge.

@hannah_west29 five comps, 22 to 90 acres, a 14 month window, and a radius out to about 18 miles. So yes, wide, and the $7,900 is fairly read as a range. The reason part of the discount still counts in a case like this is that the remaining partner bought a fractional position out at a price that did not require the market to be right. The downside in that position is the parcel itself rather than the appraisal. Your point that the blended basis is not an appreciation number is correct, and 11% a year on the appraisal is a figure worth people seeing.

The question to ask before buying out the other half is what the parcel can legally become. 40 acres in one tax parcel with a minimum lot size of, say, five acres is eight potential lots and a very different conversation with a future buyer than 40 acres that cannot be split without a full subdivision plat, road standards, and a drainage study. Some counties allow a limited number of family or minor splits without platting and some do not, and it changes by state and by ordinance amendment, so read the current subdivision ordinance rather than what someone said three years ago. If the parcel is splittable in minor increments there is also a way to sell 10 acres in year seven to fund carry instead of drawing a line, which is exactly the pressure described in this case.

@nicole_adeyemi with a five acre minimum, and an ordinance that allows two minor splits per parent tract in a ten year period without a plat, a holder in that position has a partial release valve. That is carry funding by another name, and it deserves to be framed that way in the model from day one.