Four years of no distributions, plus a 1.5x dilution clause

Been looking at land plays for two years and this is the first syndicated one I've taken seriously. 310 acres on the growth edge of a mid-size western metro, currently agricultural zoning, sponsor's plan is to run it through a general plan amendment and preliminary plat to about 780 single family lots, then sell entitled paper to a national builder.

Numbers as presented: $14.2m purchase, $4.1m budgeted for engineering, consultants, and carry, $18.9m total with a small land loan at 40% of cost. Equity raise $12.4m, $100k minimum. Projected 2.4x over four to five years, no distributions until a sale event. Sponsor takes a 3% acquisition fee and 20% of profits over a 9% simple annual return, no hurdle above that.

Things I keep circling:

Capital calls are mandatory in the operating agreement. If I don't fund, my units convert at a 1.5x penalty ratio in favor of whoever does fund. On a four-year hold with $4.1m of soft costs, a call feels more likely than not.

Zero cash flow means the entire return is one event with one buyer type. If builders stop buying lots in that submarket for 18 months, my hold isn't four years, it's however long they want it to be.

There's no depreciation to speak of on raw dirt, so the tax side that everyone praises about multifamily syndications doesn't seem to apply here.

Alternative use of the same $100k is a boring multifamily LP slot with an 8% pref where at least something arrives quarterly.

What I can't decide is whether the entitlement risk is a risk I'm capable of evaluating at all. I know land. I don't know that municipality's planning commission.

7 replies

1renee_dubois Get yours

I run 22 units and the thing I've learned is that monthly information is worth a lot. Every month something breaks and I find out where I actually stand. In your deal you find out where you stand when the plat gets approved or doesn't, and between now and then you get a quarterly letter written by the person who wants you calm.

Not saying pass. Saying the reporting cadence on a no-cash-flow deal is doing real work and you should ask what they commit to in writing. Monthly? Quarterly? Do they send the actual consultant invoices against that $4.1m budget, or just a summary?

1Rena Expert

Taking your three points in order.

Mandatory capital calls with a punitive conversion ratio are a real feature of the structure, and the mechanism matters more than the multiple. Ask what triggers a call, who decides, and whether there is any cap on the total that can be called relative to your original commitment. Some agreements let the manager call unlimited additional capital. On a deal where $4.1m of the $18.9m is soft cost and carry, the size of the reserve inside that budget is the number that tells you how likely a call is. If carry is budgeted to month 48 and the timeline slips to month 60, the call is arithmetic.

On the single exit, entitlement value is realized when someone with a development pipeline pays for it. That makes your outcome dependent on builder appetite in that specific submarket at that specific time, on top of the approval risk. Illiquidity in an LP position means you cannot exit early on your own terms, so a slipped sale extends your hold regardless of what you'd prefer.

On tax, raw land is generally not depreciable, so the pass-through depreciation that LPs in operating property cite does not apply to the dirt itself. How the rest of it treats you depends on facts specific to you and the entity, and that is a question for a CPA rather than a forum.

The piece you named yourself is the one to work on. You do not know that planning commission. The sponsor's history with that jurisdiction, including applications that were denied or took twice as long as projected, is verifiable from public records in most places, and staff reports are usually available.

1monica_tran3SF4CPRO6

My business has depended on developers actually breaking ground for five years now, so this part I do know. Entitlement sponsors have a jurisdiction, and they are only as good as their relationships and their read on that council. A sponsor with four approvals in one county is not the same sponsor in the county next door.

Go find the last two projects they entitled in that metro. Pull the application dates and the approval dates from the planning department, they're public in most states though what's posted online varies wildly. If the sponsor's deck says 18 months to entitlement and the record says their last one took 34, you have your answer without needing an opinion on land.

1kevin_lombardPG1BPRO5

Can someone explain the 1.5x dilution thing in plain terms? I've read arbor's point 1 three times. If I put in $100k and don't fund a call, does my $100k shrink, or does someone else's money just count for more than mine?

1angela_burkeServicePRO6

@juniper your dollars stay your dollars, your share of the pie shrinks, and the ratio decides how much. Whoever funds the call gets credited for more ownership than the cash they put in, so your slice gets cut harder than the raw math would suggest. It's designed to make non-funding painful, which is the point.

@arbor the part I'd push back on is treating builder demand as one switch. My crews work for two regional builders and one national, and they behave completely differently in a slow year. The nationals pull back on land acquisition first and get very picky about takedown structure. If your sponsor's whole plan is a bulk sale of entitled paper to a national, ask whether they have a second exit, like phasing and selling to a regional in takedowns. A single-buyer plan and a single-buyer-type plan are different things.

1samantha_ruizAU4APRO6

I got shown something close to this last spring and passed, purely on liquidity. Four deals in and my problem is that every dollar I commit for five years is a dollar I can't use when the thing I actually want shows up. A $100k check in an entitlement deal is a $100k check plus whatever the capital calls turn out to be, and I can't plan around an unknown number.

If you have capital that genuinely does not need to exist for six years, different conversation.

Four years of no distributions, plus a 1.5x dilution clause

7 replies