In this episode, an entitlement deal in the Western US is structured to convert an eight acre parcel into a fully platted 36 home site project, with a national home builder already locked under an LOI. The underlying land runs roughly $2M against a $4M builder LOI, with all-in soft costs of $200K to $300K. Serious Land Capital funds only the soft costs, tranched to milestones, in exchange for a 20% preferred return that accelerates to a 100% preferred (a 2x) on close plus a portion of the promote.
Key Takeaways:
- Demand a Locked Takeout Before Funding Soft cost capital only deploys once a national builder is under LOI and committed to 10% non-refundable outside the pre-plat approval.
- Price the Risk Premium at 2x A first-time structure with an unproven operator commanded a 20% preferred accelerating to a 100% preferred on a 3 to 4 month hold.
- Tranche Capital to Milestones Releasing $150K to $300K in stages rather than upfront caps the downside since the underlying land is never controlled.
- The Spread Justifies the Asymmetry The operator’s junior capital targets 6.5x to 7.5x while SLC sits senior in the waterfall for its 2x, a fair trade for the risk gap.
- AI Made the Deal Possible In-house drafting off attorney-built templates produced documents sophisticated enough that opposing counsel red-lined them as peers, saving tens of thousands in legal fees.
Listen to the full episode for the exact controls and milestone structure used to de-risk a complex entitlement deal into a potential year-defining return.
(Podcast transcript below)
Welcome to Get Serious, where at Serious Land Capital we have successfully funded over six and a quarter million dollars worth of land deals, soon to be a lot more, with industry leading 41% operating margins. so today I wanted to give an update on a deal within the entitlement space that we’ve had a lot of back and forth on really since the start of the year. but things started rapidly accelerating over the last.
couple of weeks and we are basically dotting the i’s and and crossing the t’s on on final docs here and prepping for a wire as final d d is being completed here. but a really, really interesting type of opportunity. so I’m gonna give you some, you know, headline topics here, things we were looking for, how we were structuring this, just for your own reference.
And you know, how we thought about the the risk as well. And I know I commented on another entitlement deal we were looking at earlier this year as well, too. This not the same one, but you know, a similar type of structure. So this is in the Western US, and the anticipated property is to
you know, convert roughly a eight acre piece of property into a fully platted 36 home site property and to exit to a national home builder who’s active in this particular re region. Again, I’m going to use some more general terms here just for the you know the sake of our you know confidentiality and
Particulars of this deal, but this is widely applicable in terms of just how you can think about deals like this. And just, you know, get g giving you some some heads up numbers. So critically, when we’re looking at these entitlement deals, usually people bring them to us in order to fund soft costs. So that can be a riskier part of the deal because we’re not controlling the underlying asset of the land. Oftentimes these deals are.
quite expensive and you know to purchase the underlying land as well as try to move through soft costs like it’s significant capital expenditure a large amount of time to to deal with this and you haven’t you know necessarily identified a a takeout counterparty or or an exit buyer or even if you have it’s still a lot of capital to potentially tie up so more often than not it’s figuring out can I get this property under contract, fund
Some of the soft costs, like all the engineering work and the plat approvals and so forth, line up a takeout counterparty. And so then you can have that takeout counterparty just fund the actual purchase of the property. so you don’t need to cover that, or you just find a transactional funder or bridge lender at the end to cover the underlying land purchase. And so, you know, we could come in, you know, serious land capital for.
That intermediate piece of you know, do you know, are are certain extensions being required or earnest money deposits on the underlying land? you know, again, engineering cost surveys, plat approvals, what have you, environmental studies phase one, phase two, blah, legal, back and forth or
Yeah, it is planning, consultants in in the area, all of that can be considered soft costs for for some of these properties. And it’ll depend on on the the underlying project. but the game plan is to try to you know de-risk as much of that possible so that you’re not potentially throwing money into the wind. again, what’s the number one rule? Don’t lose money whenever possible here. So again, this can get tricky.
If you have a seller where you’re, you know, could potentially walk, or maybe you’re not able to close on the property in time, you’re not able to line up a buyer, and you’re stuck, you know, potentially paying for all of these fees and costs without a a true exit mechanism baked into place or having enough control for for the underlying asset to ensure you can you know deal with any potential delays here. So
That’s why when people send us these deals, typically a requirement of ours is to already have a takeout counterparty identified and at least under a letter of intent or an LOI. So in this case, there was a national home builder already under LOI, super keen on it. They’re you’re gonna have so the the underlying parts of this deal is like a roughly two million dollar purchase of the underlying land, and the home builder had an LOI for about four million.
on it. So like a significant spread and the all in soft costs
We’re somewhere in the range of 200 to 300 K here. Again, some of this can vary, depending on, you know, what might might arise during the you know deal deal process. so I’m just you know throwing some some back of the napkin out there. so that that’s kind of the situation we were dealing with here.
And we were also able to get this home builder who is just again very active in the area, very keen on this particular property, and they were going to put down 10%, you know, non-refundable outside of the pre plat, which is kind of like the first approval of the total home sites.
That are going to be well, if we’re we’re considering residential land here, like if it’s commercial or so forth, it could be different. but you know, pre-plat in the sense of, you know, single-family residence build-outs is getting that anticipated site plan approved by whatever municipality decision making council there is. So in this particular case, there’s like a planning and zoning commission, there’s also a city council.
It’s kind of a dual approval process. There’s a couple other, you know, ancillary ones, but you know, just keeping in mind there there might be one approval depending on the area. There could be multiple. just depends. It could be could be a sequential process. But once this site plan gets approved through that you know set of decision-making bodies, that would be considered this pre-plat approval.
where the the home builder is going to be fully locked in and will feel comfortable closing on the property. Like that’s often the case that you know builders, especially the bigger ones, are just not going to acquire the raw land or, you know, go through the the full entitlement process on on their own. I mean they can. And sometimes they might just have missed out on getting
an underlying asset under contract. And so they try to, you know, work with folks who’ve already got something under contract. They bring it to them that’s attractive and so forth. And so you can kind of you know create a a win-win situation from that regard. but yeah occasionally like we we know that you know plenty of the home builders have you know billions and billions of dollars of land banked away that they’re already under contract to eventually purchase and then develop that might not have had
entitlements done on them yet. you know, e each of these builders is gonna have their their own underwriting. But yeah, it’s kind of getting beside the point here. I’m kind of giving the the baseline process and what we were looking for in this situation and how this builder wanted to de-risk the project on on their end. so
You know, the way that we came into this deal and why there was so much back and forth is gonna like when you’re dealing with these multi-billion dollar market cap builders, is just sometimes like they are just throwing different like they they’re the gorilla in the room, right? So they can just throw out different contract requests and timelines and so forth, and it’s really hard to r lock them down. Like that that’s what I’ve got a feel for during this this deal is just hey that they have so many other
governance committees and approvals baked in place and different redlining of documents going back and forth and late late changes and so forth. and I was impressed by how quickly their corporate team was able to move on a lot of these, you know, adjustments and you know redline requests. But there there’s a lot of cooks in the kitchen, a lot of moving pieces that you just have to be adaptable to be able to work with, you know, some of the largest companies in in the world.
to get something o over the finish line. And so we were cautious about getting into this deal for a while just because like it it didn’t seem that the seller was going to extend, like this builder was going to take too long to close and you know we were going to have to put up potentially like two million bucks to close. And like that that’s just not realistic for a a a deal that we haven’t you know built
a track record doing before and to put that amount of capital to work when there’s still you know so much inherent risk in into the deal, even if this builder already has been bit been lined up. but more recently the seller was willing to grant an extension and the property or the opportunity was de risked enough to to basically get to the point where
Serious Land Capital would provide anywhere between roughly a hundred fifty to three hundred thousand dollars i into the particular deal, tranched according to certain milestones, instead of you know putting all of that up front and de-risking along the way, and having a closed timeline of anticipated to be three to four months.
Roughly, and where the negotiated terms we were going to get on the deal was for us to get a twenty percent preferred return with an accelerant to a 100% preferred return on the close, as well as sharing a portion of the promote on the deal. So
you know, the operator who brought us this deal, we would also get a chunk of the proceeds outside of our double that we were looking for on our capital. and e even this was tougher to get over the finish line internally here, just again, ’cause like we’re not controlling the underlying asset. And you would say, you know, hey, we have fifty K going out here, another fifty K potentially here. Like there’s a chance where we could get wiped. and and that’s just
you know, as you can imagine, like for any investor here, like significant capital in a, you know, a market where the it’s it’s incurring further distress and, you know, cash is king here. you know, what’s the risk premium that we need to build into a deal like this, especially with an operator we haven’t worked with before in a new type of deal, where even if we’re underwriting to the best of our abilities, we might be missing some things just from
you know, being earlier in the learning curve here. It’s just like, okay, how much would we potentially need to earn in order to make this worthwhile? And so we settled on on that number. but it could have been higher. honestly there. And suddenly you guys are thinking, like, wow, this is a de-risk deal. You already have a national home builder baked in for three to four month hold and you’re gonna get two X on your money. like yes, that that that that’s the terms that
That we required for this particular setup. And it was also with an eye for a potential longer term relationship builder with with with this particular operator, where it’s like, okay, if one of these works out and I, you know, really made it clear from the start, it’s like, hey, this is the first time we’re doing one of these things. So like if this one blows up, there’s a decent chance like we’re just gonna throw the towel in for this particular structure.
i inside of coming back to it. So like we need to build in as many controls and protections as possible here with the mind that if this does work out, we could expand this business line, maybe even make it our primary, which is kind of what is trending toward going forward here. and potentially come in as like early full JV partners earlier on on the risk curve, but also building in you know, the potential return on the capital here. Because the operator side, okay, even though you’re saying, yeah, you guys are coming in for a few months.
Of de risk for like a 2x on your capital. But the the operator, even though their capital is going to be junior two Rs in the deal from a return waterfall standpoint, they stand to make somewhere in the neighborhood of like six and a half to seven and a half X on their underlying capital. So like
I mean huge return. Like the that’s why people always talk about, yeah, these entitlements, you could really drive significant returns in real estate. Like it it’s it’s hard to find returns like that, but again, risky, right? and and the chance that some of these could go to zero or blow up is certainly higher than a lot of other plays within the real estate or or land land game here. And that’s why a lot of like, you know, senior lenders do not fund these sun soft costs, right? Like you you gotta go.
find some of the smaller outfits or or the boutique outfits like us that might potentially fund this, that might have a little bit more of a risk appetite for something like this, but are also gonna, you know, require the the commensurate returns. so that was our thinking from that side as well as some of the numbers behind it here. just being mindful of the time here like
We had so much underwriting back and forth here. Again, try to de-risk as much of this possible. Again, claude cowork and AI underwriting, like just unbelievable how powerful this is. Again, AI is only gonna be as powerful as the context that you give it. you know, fortunately, we have this background in land investing. We can ask all these, you know, detailed questions, keep pushing, keep pushing. What what do we need to do here? I need to screenshot this email.
from the builder, you know, from our operator, how do I understand this? What other questions should I be asking? You know, the civil engineer who’s handling the planning and zoning meetings, what should I be asking them? You know, ro drafting these legal documentation, which is just crazy, by the way, how powerful this is getting. Like, you know, this is potentially like $300,000 deal in in terms of like capital out from our end. Like we were relying entirely on Claude for our
legal drafting. Yes, I should mention we did have, you know, attorney drafted documents that we used as a basis for this particular deal. So that certainly helps. But our ability to adapt and get best in class legal documentation, doing that in house, like if we were going back and forth with attorney, that’s like tens of thousands of dollars. And like the proof is in in the pudding here is like
When I’m sending these legal docs back, you know, our operator on the other side, he had a you know, another attorney firm who was reviewing his own docs and like reviewing and redlining ours. And they’re like they viewed all of our docs like, yeah, these are really sophisticated and like targeted red lines back to us, kind of in anticipated attorney to attorney back and forth here. like we didn’t come across as any amateurs or anything like that. So like
J just that l let that lesson again sink in that if you understand how to structure these things and utilize the right context, you you can really create some powerful documents. And including like my my business partner too, who’s like deep in the private credit world, like see, you know, back and forth legal minutia the time, like he’s trusting me to build these things out and you know, applauding me on the you know, direction of the controls that we were.
Going back and forth with. And same with the operator on the other side, dude. Really savvy. That’s why we’re excited to work with him on this one, because he’s just very responsive, very thoughtful, and you know, had a lot of back and forth, even getting red lines to the national home builder and getting them to accept some. And so, like some of these email exchanges almost like turning in like AI responses back and forth, like a few edits here and there to personalize. But like it is remarkable how much.
Just throughput you can get done. Like even as I’m recording this podcast, I’m like having okay, full fully redlined docs ready for final drafts, just going in the background. I had already provided the additional context, had all of these subfolders saved with all of our previous redlines over the past week. Boom, take that as context. I need to build all of that in so we can send it over, get this thing finalized. like it it is truly remarkable how much we can get done.
in a a short amount of of time here and to ensure that we’re really covering all of our bases and allow us to go after different regions of the country that we’re not local to because we can pull all of that insight and direct knowledge from these LLMs that have that direct capability to pull and can you know just become regional experts in you know
no time at all. Again, you gotta pay attention. You gotta read over the output. Like there’s I I there there’s no you know the problem that most people do with A AI output is like they just copy and paste and send back and forth. No, I read you know, until I’m comfortable with it. Like sometimes some some areas I’ll I’ll skim a little bit more, but like full output, especially when it’s being conveyed in my voice, like I read over every line and I’ll push it back to the AI, like no, this doesn’t sound right. This is unnecessary here. Like get rid of those dashes, etc.
we we we have to make sure the true context of what we’re trying to convey is accurate, making sure it’s not hallucinating. It still happens sometimes. So you got these long threads. So you gotta be careful with that. nevertheless, like AI is just transforming our ability to go at like if we didn’t have this, I don’t I don’t think we would have been able to do this deal. Like I’ll I’ll say that flat out. Like it it would just wouldn’t have been too complex. Like there’s so many back back and forth going on.
But the fact that like I could get my partners like as conservative as possible, like excited, even using explanation points in emails, like, yeah, this is this is really solid, really exciting what we’re doing here. Like this could be the future of the business. is is really, really cool to see come into fruition here. So I want to reference that point. without
getting stuck in a lot of the minutia, like all the back and forth here. All all all the bigger bigger takeaway here is like how we were structuring this deal, what we were looking for in the first place, how we attempted to do de-risk it as much as possible. and you know, critically like we were trying to get as many of the underwriting you know reports like the environmental and so forth lined up
prior to any of our wires going up. And and so like we’ve made this as much of a layup as possible. having the builder commit even before we’re in on on this deal, like, yeah, there is an outside chance something could go wrong. There always is. but when when de-risking is the name of the game here, like this is entirely possible to be able to come into a really complex deal like this, and find a way to potentially like drive returns for the entire year.
So, you know, we’ll see how how that goes here. but you know, again, whole nother conversation. But like this is just an interesting deal type in relation to the underlying macro that we have. to where, again, the trend in the land industry is like less flips or lower price properties, people are heading more towards, you know, value add or minor subdivides or entitlement deals, lower volume, higher value.
more complexity, potentially messy title, et cetera. like that that is the underlying trend. I still think there’s gonna be plenty of room for for flips. Like inevitably, like there’s always distress in the markets. You know, somebody’s getting divorced out there, somebody’s dying, somebody’s going into debt. and you know, especially in this macro here too, like we know for certain, like there’s, you know, just a lot of, you know, depressed consumer sentiment and, you know, lack of savings across
you know, tons of Americans here that I I entirely believe that there’s still gonna be you know additional lower hanging fruit that can arise even if it’s not as apparent right now. So that that’s another aside here. But in the meantime, like I would love to just go after some of these deals, especially you can build some of the relationships with these, you know, larger builders and like the most reliable takeout counterparties in the world, the best capitalized out there.
in in a down market like like we’re in like those are the folks that I would love to be working with more and and structuring deals like this. So excited where this one is heading. I will keep you updated along the way. feel free to to comment, follow up with me. If you have any deals like this, please reach out, seriousland dot capital. if we can do a handful of these a year, like this is it’s an extremely capital efficient business, low overhead. like I’m
Very excited about the potential here. Subscribe and share, everybody. Looking forward till next time. Take care. Bye.
