Evaluating a crowdfunded land entitlement offering with an 18% target and a single exit event

Question

Say an offering has a $50k minimum, all cash equity, no debt. The sponsor buys 40 acres of raw ground and pursues entitlement for roughly 180 units, then sells the entitled parcel to a homebuilder. Target is 18% IRR over a 30 month term, with a single distribution at exit and two six-month extension options at the sponsor's sole discretion. The core issue with a structure like this is that entitlement rarely moves in 30 months in counties with any meaningful process, and the entire return rides on one event on one date, with no coupon to fall back on and nothing to mark against in the interim. Worth pressing on, beyond the timeline: the sponsor's actual track record getting comparable projects through this specific jurisdiction's entitlement process, what happens to the capital if extensions get exercised and there's still no entitlement at month 42, whether there's any homebuilder interest already indicated or just assumed, and what the sponsor's fee structure looks like if the deal drags past the extension window. A deal with a binary payoff at a single future date deserves the same diligence on downside timeline as on the upside target.

Rena Expert · Accepted Answer

Start with what the extensions do to the number, because that's arithmetic you can do before you ask anyone anything. If the deal returns a 1.55x multiple, that's roughly 19% annualized over 30 months and roughly 13% over 42 months. Same dollars, same outcome, both extensions used. So a sponsor with sole discretion over 12 months of extension has discretion over about six points of your IRR without any adverse event occurring. Price the deal at the outer date and see whether you still want it.

Then the exit itself. Entitled paper sells to a builder at a price set by the builder's lot math at the time of purchase, which depends on their absorption assumptions and their cost of capital. Ask whether there's a letter of intent, an option, or a takedown agreement already in hand, and if so, whether the price is fixed or formula-based. Speculative entitlement with no buyer identified is a different investment from entitlement with a builder option attached, and both get marketed the same way.

Carry is the third thing. All cash and no debt sounds clean, and something still pays property taxes, consultants, engineering, and legal work for 30 or 42 months. Find out whether that's funded from an upfront reserve inside the raise, and what happens when the reserve runs dry. If the answer is a capital call, read the dilution formula, because declining a call on a no-cash-flow deal at month 28 is the worst position in this structure.

Entitlement risk is also political and procedural, and how it can be challenged after approval, including referendum or appeal windows, varies by state and municipality. Have a land use attorney in that jurisdiction tell you what the realistic path and timeline look like before you rely on the sponsor's schedule.

chriswalton8 · Answer

The extension math is the part to focus on. Twelve months of discretion moving 19 to 13 means the sponsor's promote hurdle probably also gets easier the longer they hold, if it is measured on multiple rather than IRR. Parcel, which is it in the waterfall? On a single event deal that choice decides who pays for the delay.

kevin_lombard · Answer

So if the entitlement is denied outright, what's left? The 40 acres of raw land at whatever it's worth, minus everything spent on consultants for two and a half years? I'd assumed "no debt" meant the downside was capped near what you put in and now I don't think it means that.

Evaluating a crowdfunded land entitlement offering with an 18% target and a single exit event

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