...at a 2x on a two year hold...

I'm new to most of this and I came in as a small LP, so the credit here belongs to the sponsor. But I read every document on this one twice and I want to write down what actually drove the outcome, because it wasn't what the offering memo said it would be.

Deal was a land bank and entitle play. Partnership bought 3.4 acres for $1.35M in a growing secondary market, zoned for commercial, plan was rezoning to residential and a site plan approval for 48 units, then sell to a merchant builder. Budget was $1.35M land, $340k entitlement and carry, $180k contingency. Total equity raised was $1.9M. I was in for $75k.

Sold the entitled site 26 months later for $4.3M. The partnership grossed about 2.26x on its $1.9M of equity. Net to LPs after closing costs and the promote worked out to roughly 2x on my contribution, about $150k back on the $75k.

What nearly killed it. The rezoning took 14 months against a 7 month budget, and the carry burned through most of the contingency. At month 16 the sponsor sent a letter asking whether LPs would fund a capital call of about 12 percent of committed capital. They ended up not needing it because the sponsor covered the shortfall out of their own balance sheet, which was in the operating agreement as an option and which I had read and not really understood until it mattered.

What drove the return. The buyer was a builder who needed a site to start in a specific year for reasons related to their own fund's deployment schedule. That's not a market condition, that's one buyer's calendar. The offering memo had projected an exit at $2.9M based on comparable entitled land sales and we got $4.3M because one party was in a hurry.

What I'd keep. Reading the operating agreement's capital call and sponsor loan provisions before wiring, which is the only reason I wasn't panicking in month 16.

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1marcus_hale41CG4A

The sponsor covering the shortfall off their own balance sheet is the part I'd look at hardest before you conclude anything about this sponsor. Was it a capital contribution that diluted the LPs, or a sponsor loan that accrued at some rate and got repaid off the top at sale? Those produce very different LP outcomes and both live in that same provision. If it was a loan at 12 or 14 percent preferred repayment, your 2x already absorbed it and you did fine, but you'd want to know which one happened so you can price the same clause next time.

On the exit, you're right that a motivated buyer's calendar drove the number, and I'd add that the $2.9M projected comp exit was probably the honest underwrite. Take the $4.3M out and put $2.9M in. Against $1.9M of equity plus 26 months of carry, that's maybe a 1.3x, which is a real but unexciting return for entitlement risk on a rezoning that ran double its budgeted timeline.

Which raises the question I'd actually ask the sponsor. If the rezoning had gone 20 months instead of 14 and the capital call had been real, and the only buyer available was paying comp value, what happens to LP returns? Run that. It's the same deal with two variables moved a reasonable distance, and it's the version you should assume next time.

The habit of reading the operating agreement twice is the right one and most LPs never do it.

...at a 2x on a two year hold...

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