Land for equity: how a land partnership works

The idea

When you sell your land to a builder, you get a price and the story ends. In a land partnership, your land goes into the project instead. You are paid when the homes are sold: first the value of your land, then a share of the profit.

People also call it land for equity, or a joint venture. The names differ, the idea is the same.

Step by step

1. The land is valued. You and the developer agree on a number and write it down.
2. The terms are set. The agreement says how the profit is shared and who decides what.
3. The developer designs the project and gets the permits.
4. A bank lends the money to build. The land is normally the security for that loan.
5. The homes are built and sold.
6. The money is paid out. The bank is repaid first. Then come your land value and the profit, in the order your agreement sets.

For a small residential project, count two to three years from the agreement to the last sale.

What you gain

If the project goes well, you receive more than the price a builder would have paid you for the land, because you share in what the land becomes.

You also do not have to become a developer. You do not hire the architect, manage the contractor or sell the homes.

What you risk

• Time. You wait two to three years for your money. If you need cash this year, sell.
• The market. If prices fall or costs rise, the profit is smaller. It can be zero.
• The loan. This is the point to understand before all others. Your land backs the construction loan. If the project fails, the bank is paid before you.

This is why who you partner with matters more than the share they offer you.

Five things to have in writing

1. The value of your land, and when it is paid.
2. Your share of the profit, and how the costs are counted before the profit is split. Ask which fees the developer is paid along the way.
3. Who signs the loan, and who guarantees it.
4. The decision points. The moments when you are asked before the project moves on: the design, the budget, the sale prices.
5. What happens if it stops. Who owns the plans and the permits, and how you get your land back.

Have your own attorney read the agreement, and ask your accountant how it is taxed. The tax treatment can differ from a simple sale.

Is it for you?

A partnership makes sense when you can wait, and when the lot can hold more than one home in a place where new homes sell well. If the zoning allows only one house, selling is usually simpler.

Parcelle offers land partnerships on lots that fit. The terms are set per parcel, in writing, and you are free to say no. It starts with the free Land Check.

To compare a partnership with your other options, read sell your land or build on it?