What equity split fairly reflects land value versus developer risk and effort?

Determining a fair equity split in an industrial land development partnership requires balancing the landowner’s contribution of high-value land with the developer’s execution risk, capital commitment, and operational effort. This balance is critical to aligning incentives, securing financing, and maintaining pace throughout the project lifecycle. Below are five structured considerations that help define a fair equity split:

1. As-Is Market Value of the Land

• The contributed land is treated as equity-in-kind and is typically valued at current fair market value (FMV) or discounted future value.
  
• If the land is clean-titled, zoned for industrial use, and in a prime corridor, its value may command a larger equity share (e.g., 40%–60 %).
  
• If it’s underutilized, distressed, or requires remediation or CLU (Change of Land Use), the value may be reduced in the equity calculation.

2. Developer’s Capital and Execution Commitment

• Developers typically bring cash investment, project management, regulatory execution, marketing, and financial risk.
  
• A higher risk and capital burden justifies a larger equity stake, often in the range of 40%–70%, depending on the structure.
  
• Contributions may include:
  
  • Pre-construction costs
    
  • Infrastructure funding
    
  • Working capital and team deployment
    
  • Remediation and compliance risk
    

3. Project Profitability and IRR Targeting

• The equity split should support acceptable Internal Rate of Return (IRR) targets for both parties.
  
• If the developer assumes more capital and timing risk, a preferred return model or promote structure may be used:
  
  • Landowner receives a base equity share (e.g., 40%) plus a share in upside if IRR > 18%
    
  • The developer receives a larger carry beyond the return thresholds.
    
• This dynamic helps adjust for market uncertainties and capital exposure.
  

4. Duration of Lock-In and Exit Rights

• Longer holding periods or delayed land monetization (e.g., phased development) may reduce the landowner’s effective liquidity.
  
• In such cases, the equity split may favor the landowner more heavily upfront (e.g., 50:50) to compensate for time risk.
  
• If the developer negotiates early control over cash flows or phases, equity may tilt more toward their operational role.
  

5. Governance Rights and Revenue Sharing Format

• Some partnerships use hybrid structures:
  
  • The landowner receives lower equity but a higher revenue share during lease-up or sale.
    The developer holds higher equity for control, but with capped fees or a lower promotion share.
    
• This split often balances economic value (cash flow) versus legal control (voting rights, decisions).