A sponsor holding fully entitled land asked me to come in with $1.5m of preferred equity at 13 percent, all accruing, since the land produces nothing until it's sold or a construction loan closes. Before I get further into it I want to know what the documents cost to put together and who normally pays. There's a small land loan on the parcel. I have no feel for whether this is a $10k exercise or a $60k one.
Answer
The document set on a single-asset pref is usually a short term sheet, then an amended and restated LLC agreement where your priority, the accrual mechanics, the redemption date and the default remedies all live, plus a consent from the existing lender if the loan documents restrict transfers or changes of control. If the lender is involved you may also end up with a recognition agreement, which is negotiated separately and adds time.
Fees commonly quoted for a straightforward pref of this size run roughly $15k to $50k per side, and lender negotiation is what pushes it toward the top. Get a written fee estimate with an assumption list before anyone starts drafting. The sponsor often pays both sides out of closing with a cap on your counsel's fee, and that cap gets agreed in the term sheet.
There's no title policy or recording for the pref itself, since it isn't a lien. Most investors still pay for an updated title search, commonly a few hundred to a couple thousand depending on the state, plus lien, judgment and litigation searches on the sponsor and the entity.
The thing that matters more than the legal bill on an all-accruing land pref is where your money comes from. With no cash flow, every dollar of your 13 percent depends on a sale or a refinance happening, so the entitlement and permitting timeline is your real exposure. Ask what happens to your accrual if that timeline slips two years, and whether anything outside the land itself stands behind the redemption.