From the desk:Large Multifamily / Apartments (20+ Units)

They want to option my 6 acres and pay me in equity, not cash

I've held this parcel for eleven years. It's zoned for multifamily by right, sewer is at the property line, and I've had three inquiries in the last decade and none of them serious until now.

The offer has two shapes. Cash at $1.35M with a 12 month feasibility period and two six month extensions at $25k each, nonrefundable and applied to price. Or $600k cash at closing plus a 9% interest in the development entity, which they say is worth roughly $900k at stabilization on their numbers.

I don't know how to think about the second one. I understand land. I've never owned a piece of an apartment building. The things I don't understand:

What happens to my 9% if they need more money and I don't have any to put in. What happens if they build it and it doesn't lease, given everyone here keeps saying the sun belt has too many units already. Whether "9% of the entity" means 9% of anything after the lenders and whoever put up the real equity gets paid.

Also, plainly, if new construction pencils this badly right now, why does anyone want to build on my dirt at all? That part bothers me more than the money does. I'm not in a hurry and I don't need the cash this year, which I think is the only real advantage I have here.

Answer

4paulgrant17PassivePRO5

I'm nowhere near your league on this but I did read a land option contract line by line for a family thing last year and the part that mattered wasn't the price at all. It was who carries the property during the feasibility period and what triggers the extension.

Check who pays taxes and insurance for those 24 months. Check whether the $25k extensions are automatic on their side or need your consent. And check whether the option assigns. If they can sell the option to another developer without your sign off, you may end up with a counterparty you never agreed to, and the sale price they get for the option is theirs, not yours.

On the equity, the question I'd ask them in writing is where 9% sits in the waterfall. "9% of the entity" and "9% of the common equity after preferred return" are different animals and both get called 9%. Ask for a sample distribution at three outcomes: their base case, a case where rents come in 10% under, and a case where they refinance and hand back capital. If they won't run the down case, that tells you something.

And get someone who does this for a living to read the operating agreement. Dilution language on capital calls is where a passive 9% turns into 3% and you never signed anything to make it happen.

3 replies

1Rena Expert

Your last question has a clean answer. New construction pencils badly against today's values, which sit 20 to 30 percent below the 2022 peak, while replacement costs have risen close to 39% since 2020. That gap is exactly why starts have collapsed and why pipelines in the more oversupplied Sun Belt submarkets are contracting 40 to 50 percent. A developer buying land now is not building into today's market. They are underwriting delivery in 2028 and 2029, after the current supply wave is absorbed and vacancy has compressed from the roughly 8.5% peak. If they're right about timing, they deliver into a thin supply year with firmer rents. That's the bet, and the land is the cheapest part of it to lock up because an option costs them very little to hold.

Which is the thing to price. A 24 month option with $50k of extensions is cheap optionality on your asset. You are the one taking market risk during that window, and if they walk you get the extension money and a property that is two years older with the same zoning.

On the equity structure, the mechanism to understand is the waterfall and the dilution provision. Contributed land is usually credited at an agreed value into the capital account, then it sits behind construction debt and behind whatever preferred return the cash equity negotiated. If a capital call comes and you don't fund, the standard remedies range from straight dilution to a punitive multiple on the funding partner's contribution. Both are legal and both are common, and which one applies is whatever the operating agreement says.

How the land contribution is treated for tax is genuinely consequential and varies with structure, so put that in front of your own CPA before you choose a shape.

2tylerbrooks9PassivePRO5

parcel, what it comes down to is that you're being asked to swap a known number for an unknown one and you already said you don't need the cash. That doesn't mean take the cash. It means you have room to ask for both, cash at a lower price plus a smaller equity slice with a hard cap on dilution.

The part I'd refuse is being a passive minority in an entity where the sponsor controls the timing of the sale. Eleven years of patience on your side and then someone else picks the exit year.