The agreed value of land put in as equity sets the landowner's capital account, its share of the preferred return and its share of the profit: one negotiated number, three transfers.
Land contributed to a real estate JV should be credited at its value in the state it goes in, usually as-is, and any uplift the venture itself will create, such as a planning consent, paid as a deferred land payment behind the investor's capital and preferred return. The agreed value matters more than it looks, because it sets the landowner's capital account, its preferred return and its share of profit at once. On a fictional development, crediting the land at 24.0 with consent instead of 16.0 as-is moves 5.23 of proceeds to the landowner and cuts the investor's IRR from 18.37 to 13.17 per cent.
Worked in full in Real Estate Joint Ventures by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
When a landowner, often the developer, puts a site into a venture as its equity, there is no cash price to anchor the number. The parties agree a value and record it as a capital contribution. From then on the waterfall treats that number exactly like cash: it is returned first, it earns the preferred return and it sets the pro rata share of whatever is left. A generous land credit is therefore not a one-off concession; it compounds through every tier. The calculation below shows how far, and how a deferred payment can give the landowner the uplift without making the investor pay for it in advance.
| Input | Value |
|---|---|
| Land, contributed in kind by the landowner-sponsor | credit to be agreed |
| Land value as-is / with planning consent | 16.0 / 24.0 |
| Investor cash equity | 25.0 |
| Construction and other costs, all cash | 80.0 |
| Construction loan, repaid at exit | 55.0 |
| Net exit proceeds, year 3 | 130.0 |
| Preferred return, compounding, pro rata | 8% |
| Above the preferred return: promote to sponsor, rest pro rata | 30% / 70% |
Step 1: capital accounts. 20.0 of land and 25.0 of cash make 45.0 of equity: 44.4 per cent landowner, 55.6 per cent investor.
Step 2: distributable proceeds. 130.0 less the 55.0 loan leaves 75.0.
Tier 1, capital: 45.00, pro rata
Tier 2, preferred return: 45.0 × (1.083 − 1) = 45.0 × 0.2597 = 11.69; 5.19 to the landowner, 6.49 to the investor
Tier 3, excess 18.31: promote 30% = 5.49 to the sponsor; the other 70% pro rata, 5.70 and 7.12
Landowner-sponsor 36.39, 1.82 times its land credit; investor 38.61, 1.54 times, an IRR of 15.59%
| Land credit | Total equity | Landowner share | Promote | Landowner receives | Investor receives | Investor multiple | Investor IRR |
|---|---|---|---|---|---|---|---|
| 16.0 as-is | 41.0 | 39.0% | 7.01 | 33.54 | 41.46 | 1.66x | 18.37% |
| 18.0 | 43.0 | 41.9% | 6.25 | 35.03 | 39.97 | 1.60x | 16.93% |
| 20.0 | 45.0 | 44.4% | 5.49 | 36.39 | 38.61 | 1.54x | 15.59% |
| 22.0 | 47.0 | 46.8% | 4.74 | 37.63 | 37.37 | 1.49x | 14.34% |
| 24.0 consented | 49.0 | 49.0% | 3.98 | 38.77 | 36.23 | 1.45x | 13.17% |
Two things stand out. Each 1.0 of extra land credit moves about 0.65 of proceeds to the landowner, 5.23 across the range, and 5.20 points of IRR away from the investor. And the promote falls as the credit rises, from 7.01 to 3.98, because a larger capital base means a larger preferred return to clear before the promote tier begins. A sponsor who argues for a high land value is trading promote for capital, and on these numbers winning the trade.
| Exit | Distributable | Investor at 16.0 | Investor at 24.0 | Cost of the higher credit | Multiples |
|---|---|---|---|---|---|
| 105.0 | 50.0 | 30.49 | 25.51 | 4.98 | 1.22x / 1.02x |
| 115.0 | 60.0 | 35.06 | 30.61 | 4.45 | 1.40x / 1.22x |
| 130.0 | 75.0 | 41.46 | 36.23 | 5.23 | 1.66x / 1.45x |
| 150.0 | 95.0 | 50.00 | 43.38 | 6.62 | 2.00x / 1.74x |
In a weak exit the higher credit is close to a transfer of the investor's capital: at 105.0 the investor gets back 1.02 times its money instead of 1.22, because the land claims its inflated share of the capital tier before there is any profit at all.
The common mistake is to credit land at its value with planning consent, or at a residual value built on the venture's own business plan, when the consent is still to be obtained and the venture is paying for it. The investor then pays twice for the same uplift: once in the land credit and again by funding the planning costs and risk. The fix is to credit the land at its as-is value of 16.0 and give the landowner the uplift as a deferred land payment of 8.0, paid from proceeds after capital and the preferred return. At a 130.0 exit the landowner still receives 36.95 and the investor 38.05, a 15.02 per cent IRR, close to the 20.0 compromise. At 105.0 the deferred payment is not reached and the investor keeps 30.49, exactly what the as-is credit gives it. The landowner is paid for the value when the value exists.
Why the promote and the investor's net return move as they do is set out in how much the promote reduces the investor's IRR, and the sponsor's full economics in fees vs promote. Real Estate Joint Ventures builds its waterfall as a live engine with a sheet for a deal of your own; it is among the free workbooks for the book.
At market value in the state it is contributed, not at the owner's historic cost and not at a value that assumes work the venture will do. On the fictional deal an as-is value of 16.0 gives the landowner 39.0 per cent of the equity; a with-consent value of 24.0 gives 49.0 per cent, although the venture, not the landowner, bears the cost and risk of obtaining the consent.
Less than 1.0 but more than its pro rata share suggests. On the fictional deal, moving the land credit from 16.0 to 24.0 shifts 5.23 of proceeds to the landowner, 0.65 for each 1.0 of credit, because the credit earns capital back, the 8 per cent preferred return and a larger pro rata share of the profit split.
Because more equity in the venture means a larger preferred return to clear before the promote tier starts. On the fictional deal the promote falls from 7.01 at a 16.0 land credit to 3.98 at 24.0. The landowner-sponsor still gains overall, 33.54 to 38.77, because its capital tiers rise faster than its promote falls.
This article is one calculation from Real Estate Joint Ventures. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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