This episode explains the pre profit fixed allocation (fixed aloe) structure used in roughly one out of every three to four deals, typically on properties with higher exit price variance or inferior characteristics relative to comps. A $5,000 fixed aloe on a $100,000 purchase means Serious Land Capital receives principal, expenses, and the next $5,000 of gross profits before the remaining profits split at the agreed ratio, with a stop limit typically set at 2x gross purchase price where the fixed aloe gets waived to preserve land investor upside.
Key Takeaways:
- Fixed Aloe Protects Upside Not Downside The structure ensures minimum 1.2x net MoIC on conservative exits but cannot protect against buying at wrong prices, requiring purchase at maximum 60% of conservative market value.
- High Variance Markets Trigger Fixed Aloe When comps show price per acre ranges like $11,000 to $23,000 with unclear characteristic differentiation or recency issues, fixed aloe preserves returns despite uncertainty.
- Stop Limits at 2x Preserve Investor Wins If gross sale price doubles the purchase price, the fixed aloe disappears entirely to reward land investors for higher range outcomes in volatile markets.
Listen to the full episode for additional creative financing techniques and the complete rationale for when fixed aloe structures make sense.
(Podcast transcript below)
Hi, Chris Duff over at Serious Land Capital, vacant land funding partner. Today I wanted to go over one of the creative financing techniques that we use within our funding business and allows us to take a look at potentially more deals than we may consider otherwise.
And this particular item that I’m going to comment on today is called a pre-profit fixed allocation. Effectively, that means a preferred return, but we’re just talking about absolute numbers versus a percentage. So it’s just kind of like fancy finance speak for meaning effectively the same thing. So to break it down,
as simple as possible. And then I’ll get into how we use this strategically is say there was a deal that the purchase price on it was $100,000. If we were a little bit more concerned about the exit price on it, we might ask for say a $5,000.
pre-profit fixed allocation, which I’ll just refer to as a fixed aloe for short going forward. And effectively what that would mean is that when our firm, you know, upon exit of the sale, assuming it is a profitable sale of the property, we would get all of our principal back plus any, you know, associated expenses with a deal that were related to closing costs.
et cetera. And then out of the remaining gross profits, we would effectively take the next $5,000 that’s available out of those profits first. And then the remainder of profits past that $5,000 initial slug is going to be split to whatever profit split that
we had determined before, let’s just say 50 50 for example there. So that effectively allows us, it doesn’t necessarily protect downside. It’s more of an upside protection because downside protection, just, you need a lower price overall on the property. You know, no matter how much upside you might preserve, if you’re buying at the right price, like your downside’s not protected. So it’s more of an upside protection.
mechanism for us to ensure that we can hit kind of the baseline multiple uninvested capital that we’re typically looking for of roughly 20 % or 1.2x, at least net multiple invested capital or MoEC for short. So we can try to reverse engineer that with a conservative anticipated exit price.
and how we might build in a fixed aloe to reliably hit that number and make our dollars at work worth our time effectively. So we tend to use this approach, I wouldn’t say a majority of the time, maybe like one out of every three to four deals at max might be considered with a fixed aloe in mind.
Um, and you know, as anybody knows who’s been in land for, you know, uh, even a short period of time, like, you know, the markets, the market, there’s, there’s really no guarantee you’re going to get a, um, you know, a certain exit price, matter how good your underwriting is, you know, markets can change. Something may have come up, um, from a DD perspective after you already buy that just kind of disturbs the.
value of the property, maybe other more superior properties come onto market after buyer pool just dries up for whatever reason seasonality like there’s a million reasons for why things don’t go exactly according to plan. so, you whenever we see that there could be a higher variance.
Outcome for the dispo price and a lot of this is informed by the the other comps on the market, you know, we always are looking at our characteristics in relation to the Comp’s and seeing how they compare are they more superior versus inferior? If they’re more superior then you know, we’re more willing to take a risk and you know, potentially less Need for a fixed out of the more inferior the property is, you know higher risk the higher variance outcome potentially
the more likely we would want to build in a fixed aloe. And if we see a pretty significant gap of price per acre within a certain market and tough to differentiate even between characteristics, like say, just for example, like the price per acre for exits of property in the area was like between
$11,000 and $23,000 per acre. And yes, if you examine it more thoroughly, like the $23,000 per acre exits probably are more superior on average, but potentially they have longer days on market or the differences were just a little less.
stark than we might imagine, or maybe, you know, the ones that sold for 23,000 acres sold, you know, closer to a year ago versus the ones that sold closer to 11,000 acre or right around there were a bit more recent. So you have to balance all of these factors in mind to determine, okay, where do I need to be on a price per acre perspective to be conservative enough to really protect my, know, anticipate protecting my downside. so, you know,
We’re always going to try to determine that first and then figure out, okay, what’s the seller dynamic here? Is there any room to negotiate further? If it’s just a hard stop, hey, no, this deal’s not happening unless you hit my number, then we really have to determine, okay, is there room for us to do a fixed aloe without taking too much risk on the deal? So usually we won’t go above roughly 60 % purchase price.
of conservative market value, like that’s usually a pretty firm guideline there, know, plus or minus a percent or two potentially, depending on the underlying market. And, you know, in those cases where, there might be more inferior characteristics related to the subject or more variance in the market than to try to preserve that upside a bit more. It’s like, okay, we
could buy at that price that’s sitting at maybe 60 % of that conservative value, but build a fixed aloe onto it, try to preserve our upside. And the way we try to make it even more fair for…
the land investors who worked for us is that, okay, if there’s a high variance here, then, you know, if we’re able to, you know, generally double, the, purchase price in, in a gross sense, you know, pre, broker fees and closing costs, et cetera. then we can effectively hit kind of a stop limit for when that fixed aloe,
is taken into account. you know, say, we had that a thousand dollar price deal. and, we put in kind of that, that stop limit again of, okay, if this property sells for over 200,000, we have to agree that, you know, that there is a chance it could sell for that. Like this, is it worth listing above 200,000 to see if there’s any buyers on the market? If that makes sense, then, then yes, we could set.
the initial list price there. And if it truly exits at that number, then we just waive the fixed aloe because then that are, we’re still going to be satisfied from a multiple uninvested capital perspective and still try to preserve more of the upside for the land investor who brought us the deal. So they’re not penalized for, you know, a a higher range outcome.
in a higher variance market, whereas, yeah, if we have to start cutting price or we just don’t find the right offers at that higher range, then we have that fixed out to protect us. So we have all of that built into our docs to allow us some flexibility and try to provide as many fair solutions as possible. And, you know, allows us to do more deals than we might otherwise be able to participate in when we can kind of have some more flex with.
with the numbers there. hopefully that gives you an idea on how we operate from that perspective. There’s some other creative techniques that we also have. I can get into another one, but wanted to share that just because we’re heavily looking at doing this fixed aloe again on another deal in Texas here shortly. So was kind of top of mind and I know people ask about this a lot.
to allow for more flexibility in deals. So hopefully that gives you an understanding on how we utilize it and kind of the rationale behind it too. beyond that, as always, if you’re looking for funding, SeriousLand.Capital or zero cost review of your land deals at Land Daily Diligence Facebook group, about to, just did some yesterday, some very large deals and then.
be back on Thursday. So that’s Monday and Thursdays. And landpricer.ai for the most simple and accurate way to price land. The pricing feature is basically fixed. There’s like one more small bug that just needs to be adjusted. That’ll be ready by tomorrow morning. But I just tested out a lot more. The engineering team is really closing in on wrapping this thing up. So beta test invites. I’m actually going be reaching out to people.
even later today. So FYI on that, looking forward to next time. Subscribe and share. Take care. Bye.
