Preferred capital into a nine lot split with no verifiable closed lot prices

Take a sponsor offering $220,000 of preferred capital at 11% accrued, no current pay, into an 86 acre split, where the numbers deserve scrutiny before the modeling even starts. Say the sponsor's numbers are: 86 acres at $602,000, so $7,000 an acre. Nine lots averaging 8.7 acres after right of way. Shared gravel road, 1,900 feet, engineering and construction $310,000 all in. Retail $148,000 a lot, $1,332,000 gross, 6% commissions of $80,000. Add $140,000 of soft costs and carry over 22 months and total capitalization is $1,052,000 against $1,252,000 net proceeds, roughly $200,000 of profit. The preferred position accrues about $44,000 over the life if it runs the full 22 months, so on paper there is roughly 4.5x coverage on accrued interest, with the remaining profit going to the sponsor. The capital stack in a case like this might be $602k land with $420k of it seller carry, $220k of preferred capital, and $180k of sponsor cash, with the preferred capital funding the road. Absorption assumed at nine lots in ten months starting at month 12 is aggressive and worth stress testing. The real problem is often not in the spreadsheet but in the comps. In states where sale prices are not public, active listings and phone conversations with agents are frequently the sponsor's own listing comps repeated back. Two comparable lots listed at $155k and $149k, one sitting 140 days, with no visible closed price, means the entire profit figure rests on an assumed retail number rather than a verified one. If the real clearing price runs meaningfully lower, say $126k instead of $148k, the profit cushion can disappear before the preferred position is even paid. Given that gap, funding flat at 11% and treating the seller carry and sponsor cash as the only cushion is a real risk to weigh against pushing for structural protection, such as per-lot release language, even where a sponsor resists it because an existing seller carry note already has its own payoff terms. When the comps supporting the profit cannot be independently verified, that is exactly when structural protection matters most.

6 replies

gregpowell66 AC4BPRO 19

Put $310,000 against 1,900 feet of gravel road plus engineering and you get $163 a foot with the engineering inside it. That is tight even for gravel. What is the base depth the county wants, and how many culverts? Every drainage crossing on a rural road is a pipe, a headwall and a permit, and a single crossing can eat $30k when the inspector wants it upsized. Also ask whether the county requires a bond or a letter of credit for the road before it will record the final plat. If it does, that money is capital nobody has budgeted, and it is frozen until the road passes final inspection, which can be a full season after the work looks finished. The risk order here goes road cost first, then absorption, then price. He is showing zero contingency on a $310k line.

gregpowell66 AC4BPRO 19

tylerbrooks9 AO1APRO 10

Why is this structured as preferred equity rather than a note secured by the land? If you are funding the road, you are the money that creates the thing everyone else gets paid from, and you are taking last position on a $200k margin that three people in this thread already think is soft. An 11% accrual with no current pay and no release schedule means you find out how the deal went in month 24. His reason for refusing per lot releases is that the seller carry has its own payoff terms. That is an argument for reading the seller note, and it is no argument against your protection. If the seller wants a set amount per lot released, the remaining proceeds per closing are a known number and yours can sit right behind it.

tylerbrooks9 AO1APRO 10

tonyv88 PU4APRO 10

His stated reason for refusing release language is the thing to chase, and it is checkable in an afternoon. Get a copy of the seller carry note and read the partial release provision. Seller notes on acreage usually do one of three things and each changes your answer: no release at all until paid in full, a fixed release price per lot, or a release based on a percentage of the appraised or contract price. If the seller's note has no partial release, the plat can be recorded and the lots still cannot convey clean until the whole $420,000 is satisfied, and his month 12 to 22 absorption schedule is impossible as written. That would be the real reason he does not want to talk about release schedules. On the price you cannot verify. In a state that does not publish sale prices, the three sources that reliably produce something are the local title company, who will often talk about ranges even when they cannot hand over a document, an appraiser who does rural land in that county and will pull their own file work for a fee, and the agents who represented the buyers rather than the sellers. Recording and disclosure practice differ by state, so confirm what the title company is actually permitted to share before building anything on it. Pay the appraiser. On a $220,000 check, $900 for a real opinion on nine lots is nothing, and have them opine lot by lot the way thicket said, never on an average. The other thing to fix regardless of price. His absorption starts at month 12. Preliminary approval, road construction, as built survey, final plat recording, and only then can a lot convey. If any of that slips a season, and final plats routinely sit at the county for weeks longer than anyone plans, month 12 becomes month 17 and the accrual runs five extra months into a margin that is already thin. Either the road is done and the plat recorded before the clock on his projection starts, or the accrual rate changes once it has not happened. So two documents before deciding anything. The seller note's release language and an independent lot by lot price opinion. If the release language is bad, there is no rate that fixes it.

tonyv88 PU4APRO 10

chriswalton8 CC1CPRO 17

The enforcement mechanism deserves a direct answer. If lots sell slower than his model and month 30 arrives with $220k plus accrued sitting there unpaid, what does ledger actually do? The position sits behind the seller carry and it is preferred equity, so there is nothing to foreclose on. Is it just a conversation, or does the draft carry language that gives the money some teeth without turning it into a loan? Also @tonyv88, if the seller note has no partial release, does that kill the deal outright, or does the sponsor simply have to raise more so he can pay the $420k off before he starts selling?

chriswalton8 CC1CPRO 17

stephen_ok9ActivePRO

11% accrued for last-in capital funding the road on a nine lot split with unverifiable retail pricing looks cheap to me, and I say that as someone who'd like to be putting money into exactly this shape of deal.

If the deal works, he pockets $200k on $180k of his own cash and you get 11%. If the price is $126k instead of $148k, you're the one eating it. That's not a split of the outcome, it's you selling him insurance at 11%.

I'd rather see either a piece of the profit above a hurdle or a rate that steps up after month 18, which also puts pressure on his absorption schedule in a way a flat accrual doesn't. And I'd want @tonyv88's appraisal in hand before I priced any of it, because the right rate for $148k lots and the right rate for $126k lots aren't close to each other.

stephen_ok9ActivePRO

Preferred capital into a nine lot split with no verifiable closed lot prices

6 replies