Land Equity Defined: In the context of a real estate development transaction, Land Equity is non-cash equity credit given to a land owner if the land owner elects to contribute the land as equity instead of selling the land for cash to the developer. The “credit” is given by both the developer (project Sponsor) to the land owner, and by the lender to the Sponsor. Whether the amount of credit given by both Sponsor and lender is identical depends on the individual transaction circumstances and is the result of negotiation.
How Land Equity Is Represented In A Real Estate Development Pro-Forma:
Within The Uses of Funds:
- Contributed Land Equity Value (instead of Land Cost)
- Hard Costs
- Soft Costs
- FF&E
- Financing Costs
Within The Sources of Funds:
- Contributed Land Equity Value (instead of Cash Equity above and beyond the amount represented below)
- Contributed Cash Equity
- Debt Financing
How Lenders Treat Land Equity: Land equity is addressed differently by different banks and differently for different transactions. Typically, a Lender will give a Sponsor credit for Contributed Land Equity that is based in part on:
If the land has traded recently, 100% of the Purchase Price at which the land traded in an arms-length transaction. However, if the transaction was not arms-length (say a Master Developer entity sells the land to its owned Vertical Developer entity for a Purchase Price of $10.00), or if the land has been owned for a very long time and has such a low basis that it is not a reasonable number at present, then the Lender will base the amount on:
- A stated value based on recent comparable land sales (an Appraisal is not always ordered by the Bank if comps are available), or
- Some percentage (less than 100%) of an Appraised value.
The final dollar amount for which credit will be given for Contributed Land Equity will be the result of a negotiation between the Sponsor and the Lender, and will be influenced by:
- the track record of the Sponsor
- how aggressive the current lending environment is, and
- the amount of Contributed Cash Equity from the Sponsor.
The Lenders Loan-to-Cost % will be applied against the Total Project Cost inclusive of the Contributed Land Equity Amount even though the Land is not a cash cost. As a result, the Lender will have a first lien on the land.
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