LAND DEVELOPMENT STRATEGY: BUSINESS STRUCTURE ALTERNATIVES ULI Fall Meeting Large Landowners Forum Gregg Logan, Managing Director, RCLCO
HOW LANDOWNERS DO DEALS WITH DEVELOPERS PRESENTATION OVERVIEW ► Large land owners have the property, ► What are the potential rewards and risks developers have knowledge, experience, associated with pursuing one strategy versus access to capital another? ► Pros and cons of various deal structure ► Examples alternatives? ► Key considerations when deciding » Sell » Participating in deal » Form a joint venture » Self develop Land Development Strategy: Business Structure Alternatives | 10/24/2017 | 2
IS THERE A MARKET? WHAT ARE OWNERSHIP’S GOALS? WHAT ARE THE DISPOSITION OPTIONS? MARKET OWNERSHIP'S EVALUATE OPPORTUNITY GOALS STRUCTURE OPTIONS » Market Study, » Risk Tolerance » Property Sale » Desired Control » Sale With Feasibility Analysis » Expertise, Participation » Financial Model/ » Joint Venture Capital Valuation » Financial » Direct Commitment Ownership / » Timing Development » Other » Tax Implications Land Development Strategy: Business Structure Alternatives | 10/24/2017 | 3
WHO DO WE SELL TO OR PARTNER WITH? HOW TO EVALUATE PROSPECTS? HOW TO SELECT? IDENTIFY EVALUATE BUYER / PROSPECTS PROSPECTS PARTNER SELECTION » Active in Your » Introductions, » Term Sheet » Negotiations Market Information, » ULI Interviews, » Legal Tours » Professional » Ranking Services Based on Team Referral Best Fit » RFQ, RFP Land Development Strategy: Business Structure Alternatives | 10/24/2017 | 4
EVALUATING STRUCTURE ALTERNATIVES RISK HIGHER LOWER DEVELOPMENT CONTROL HIGHER LOWER DEAL AS-IS SALE W/ JV DIRECT STRUCTURE PROPERTY SALE PARTICIPATION PARTNERSHIP OWNERSHIP Sale of bulk acreage for Sell property Contribute land into Create/purchase/ hire Description a determined price (takedowns?); potential development partnership development company (takedowns?) revenue participation as limited partner Developer mostly; some Risk bearer Developer Both members Land Owner Land Owner Land Owner only Base price for land plus Based on success of Based on success of Distributions receives purchase price participation project; negotiated project amount Land Owner As limited partner, based Development None None Total control on negotiated deal Control Land Development Strategy: Business Structure Alternatives | 10/24/2017 | 5
STRUCTURE ALTERNATIVES CASH FLOW RISK HIGHER LOWER FINANCIAL RETURNS HIGHER LOWER DEAL AS-IS SALE W/ JV DIRECT STRUCTURE PROPERTY SALE PARTICIPATION PARTNERSHIP OWNERSHIP Sale of bulk acreage for Sell property Contribute land into No cost of land; Land Sale/ a finite price; single (takedowns?); funds development partnership significant development Contribution sale or a series of directly from developer or as limited partner costs takedowns as % of project revenue Developer Developer responsibility; Development Costs Developer responsibility Land Owner responsibility responsibility negotiable 1 st Profit % of revenues to Land Return of equity to All profits/losses to Land None to Land Owner Distribution Owner members Owner 2 nd Profit Return of equity None to Land Owner Possible developer pref Distribution Developer 3 rd Profit Remaining cash to None to Land Owner Negotiated distributions Developer Distribution Land Development Strategy: Business Structure Alternatives | 10/24/2017 | 6
RCLCO LESSONS LEARNED 3 COMPONENTS OF LARGE LAND DEALS ► Land (Difficult to Value) ► Cash ► Talent RISK ► Deals should be structured around risk profile and organizational capacity/goals LARGE LANDOWNERS ► Often choose joint venture or direct ownership options ► Direct ownership has proven challenging ► Good examples of developer partnerships Land Development Strategy: Business Structure Alternatives | 10/24/2017 | 7
EXAMPLE: OUTRIGHT PROPERTY SALE DEAL FUNDAMENTALS LANDOWNER DEVELOPMENT RESPONSIBILITIES/CONTROL ► Sell a large acreage parcel ► None ► Challenge: developer economics may not make single large purchase a reality LANDOWNER RISK ► Difficult to properly value land over long time ► Limited horizon ► Negotiations typically turn to takedown LANDOWNER FINANCIAL schedule, participation, or JV UPSIDE/TIMING ► Outright land sales for large acreage are rare ► No upside beyond the agreed upon sale because the large upfront costs undermine terms Developer economics and land is hard to value ► Cash flow upfront Land Development Strategy: Business Structure Alternatives | 10/24/2017 | 8
EXAMPLE: PROPERTY SALE – TAKEDOWNS DEAL FUNDAMENTALS LANDOWNER RISK ► For example: transaction on 5,000 acres ► Limited; must earn entitlements ► Land sale in fixed schedule of takedowns FINANCIAL UPSIDE/TIMING ► Each takedown with 20% deposit; interest ► No upside beyond the agreed upon sale paid on balance terms LANDOWNER DEVELOPMENT ► Cash flow upfront RESPONSIBILITIES/CONTROL ► Land closing contingent upon gaining entitlements ► No development responsibilities Land Development Strategy: Business Structure Alternatives | 10/24/2017 | 9
EXAMPLE: PARTICIPATION DEAL FUNDAMENTALS LANDOWNER DEVELOPMENT RESPONSIBILITIES/CONTROL ► Example: 5,000 acres ► None ► Sale of property LANDOWNER RISK ► Series of relatively equal takedowns after entitlements ► Limited risk due to guaranteed takedowns ► Initial Takedown: Base per acre appraised value LANDOWNER FINANCIAL UPSIDE/TIMING ► Subsequent Takedowns: 3% inflation ► Additional Purchase Price ► Participation in % of gross sales; but not back end distributions ► 20% of Gross Sales once amount exceeds takedown payments ► Some upfront cash flow from takedowns; potential for ongoing cash flow from revenues ► Less commissions and closing costs Land Development Strategy: Business Structure Alternatives | 10/24/2017 | 10
EXAMPLE: JOINT VENTURE 1 DEAL FUNDAMENTALS LANDOWNER DEVELOPMENT RESPONSIBILITIES/CONTROL ► Example: 5,000 acres venture with developer ► Developer acts as Managing Member ► Form a Joint Venture LLC ► Landowner to have voice in major decisions ► Governed by an Executive Committee and Overall/Annual Business Plans, equal LANDOWNER RISK representation ► Medium-high ► Contributions » Landowner contributes land to venture LANDOWNER FINANCIAL » UPSIDE/TIMING Developer responsible for project costs ► Distributions ► Earliest cash flows linked to gross revenues; » % of revenues to landowner only start when sales start » Developer return of capital ► Split of upside distributions could be » significant but occur later in the life of the 50/50 split of remaining cash flow project Land Development Strategy: Business Structure Alternatives | 10/24/2017 | 11
EXAMPLE: JOINT VENTURE 2 DEAL FUNDAMENTALS LANDOWNER DEVELOPMENT RESPONSIBILITIES/CONTROL ► 5,000 acres ► Developer acts as Managing Member ► Joint Venture LLC ► Landowner to have voice in major decisions ► Contributions » LANDOWNER RISK Landowner contributes land as equity » Developer responsible for ongoing project ► High costs LANDOWNER FINANCIAL ► Distributions » UPSIDE/TIMING Proportionate return of equity until Landowner land contribution is made whole ► Earliest cash flows only from positive project » 60/40 to Landowner of remaining distributions cash flow ► Split of upside distributions could be significant but occur later in the life of the project Land Development Strategy: Business Structure Alternatives | 10/24/2017 | 12
AUSTIN LA ORLANDO DC 221 W 6th St 11601 Wilshire Blvd 964 Lake Baldwin Ln 7200 Wisconsin Ave Suite 2030 Suite 1650 Suite 100 Suite 1110 Austin, TX 78701 Los Angeles, CA 90025 Orlando, FL 32814 Bethesda, MD 20814 Gregg Logan Managing Director P: (407) 341-4859 E: GLOGAN@RCLCO.COM W: RCLCO.COM
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