The investment strategy historically adopted by investors in the US commercial real estate market has transformed notably in recent years, driven in part by evolving patterns in consumer demand and shifting economic conditions. Prior to this shift, commercial real estate investors focused on traditional asset classes, such as office, hospitality, multifamily for-rent residential, and retail. However, there has been a recent surge of investor interest in alternative real estate investments. Alternative investments include a variety of nonresidential assets, such as data centers, self-storage facilities, medical office buildings, and industrial developments. But investors have also demonstrated interest in alternative residential investments, such as master-planned residential communities (MPCs), single-family residential, build for rent residential, senior living facilities, and student housing.
One reason for the growing interest in deploying capital in the alternative residential real estate market is the housing crisis in the United States, where that demand for affordable housing continues to outpace supply. Soaring home prices and high interest rates have put homeownership out of reach for many Americans. As working from home became more prevalent with the COVID-19 pandemic, homebuyers also reevaluated where and how they want to live and work. Simultaneously, the United States continues to experience a major demographic shift due to an aging population, which has resulted in increased demand for retirement communities and assisted living facilities.1
Alternative real estate products have been developed to address and adapt to these demographic and economic shifts, catching the attention of a growing number of commercial real estate investors. MPCs — which surged in popularity as part of the post-World War II suburban population boom — can be described generally as large-scale single-family residential communities characterized by comprehensive planning and integration of various land uses and recreational amenities, schools, commercial areas, and open spaces.
MPCs blend residential, recreational, and commercial components in a way that appeals to both consumers and investors. In particular, MPCs offer residents a high quality of life with convenient access to recreational activities such as parks, walking paths, golf courses, marinas, schools, and retail centers. These planned developments often provide resort-style living, making them attractive to both retirees and active families. And as the prospect of owning a home seems out of reach for greater numbers of millennials, MPCs can offer young families the opportunity to enjoy larger homes, backyards, and proximity to newly constructed schools at a lower price point than residences in urban metropolitan areas.2
MPCs have become increasingly popular,3 particularly in regions with year-round warm weather and outdoor recreational opportunities. The pandemic and remote work opportunities accelerated this trend as more people opted for homes in suburban or rural areas over city living. According to recent data, homebuilders are increasingly focusing on the Sun Belt, where warm weather and lower costs of living are driving migration patterns.4 In states such as Texas and Florida, new homebuilding activity has surged, with a noticeable increase in the construction of single-family homes and large-scale developments.5
Fully developing and entitling MPCs and smaller single-family-rental and build-to-rent communities can be time-consuming and challenging. Furthermore, selling portions of an MPC to merchant homebuilders for development can be unfamiliar territory for investors who have not previously invested in MPCs. Investors should consider the key differences in MPC purchase and sale agreements when they negotiate sale terms for these alternative residential assets.
Purchase Price Calculation, Profit Participation, and Escalators
Residential land deals often contain creative ways of allocating and calculating the purchase price for the land, which sets them apart from other real estate asset classes in which a single purchase price for the entire asset is paid to the seller at closing. For example, purchase and sale agreements for residential land (a "builder PSA") often calculate the purchase price based on the number of subdivided lots actually created within the planning area being sold to the builder. A large lot or planning area sold to a builder pursuant to a builder PSA may not have been subdivided into residential lots at the time of sale, so it is up to the builder to process and record the final subdivision map. Sellers will want the greatest possible number of lots to be created in order to maximize the purchase price, but builders may want to create fewer lots for myriad reasons, including market pricing, consumer demand, and lower land acquisition costs. Accordingly, savvy sellers of subdivided lots often negotiate a guaranteed minimum purchase price for all of the lots regardless of the number of lots that are actually created by the final subdivision map. The approach taken in any builder PSA depends on how involved the builder will be in the subdivision process. For example, if the builder has control over the final subdivision mapping process, sellers will want to ensure that they receive a minimum purchase price. If the seller controls the final subdivision process, a guaranteed minimum purchase price may not be necessary.
A portion of the purchase price is often paid to the seller after closing as profit participation. Typically, this profit participation is paid as a percentage of the builder's profit when the builder sells a home that it has constructed on the lot to a member of the homebuying public. The profit participation concept is unique to alternative residential assets, and it provides sellers with ongoing revenue streams, sometimes for years after the land has been sold to the builder. Great care must be taken in describing the methodology for calculating profit participation, including the types of costs that may be considered. The methodology for calculating profit participation varies greatly from market to market.
Builder PSAs often split the sale of the land into separate closings or takedowns, unlike other asset classes that have a single closing with certain post-closing survival periods. For example, the builder may agree to buy 10 of a total of 100 lots at one closing, another 10 at a second closing, and so on. The phased takedowns allow the builder to segment the home construction process and allow a portion of the homes to be built and sold before commencing the next phase. A builder may decide to delay a phase if sale activity and absorption rate are slower than projected. Sellers often accommodate a builder's request to delay so that lots are not held on the builder's balance sheet for extended periods of time.
Sellers often negotiate purchase price "escalators" to protect themselves from market risk for builder PSAs with multiple closing timelines that may extend for multiple years. The escalator automatically increases the purchase price by a certain percentage at each closing after the initial closing, which continues to accrue until the phased takedowns actually occur.
Sellers' Ability to Use Deposit Funds for Development Costs
Builders' deposits in residential land deals are regularly released to sellers upon expiration of the due diligence period so that the seller can use the deposit funds to fund the seller's development of the community or the property to be sold, including grading completion, utility installation, and other horizontal and backbone infrastructure improvements. This is different from other asset classes in which the buyer's deposit remains in escrow until it is applied at closing as a credit against the purchase price. Using a builder's deposit to fund these costs typically provides the seller with a cheaper source of funds for development expenses without the need to fund equity — and it is accretive to the internal rate of return for the investment.
Builders typically request some form of security to secure the seller's obligation to return the deposit if the builder PSA is terminated and the buyer is entitled to get the deposit back. Builders typically require sellers to execute and deliver a mortgage (or local equivalent) and a promissory note to secure the return of the remaining deposit amount. If the property is not available to secure the deposit amount because of existing debt or mapping considerations, builders may instead accept guarantees from creditworthy affiliates of sellers or security instruments recorded against other collateral owned by the seller. Builders that do not insist upon the recordation of a security instrument will still usually push to record a memorandum against the property memorializing the seller's obligation to return the deposit. The form of security requested by the builder primarily depends on the size of the deposit released pursuant to the builder PSA.
Presale Development Obligations and Municipal Bond Financing
Builder PSAs typically set forth each party's pre- and post-closing development obligations, including required sitewide infrastructure and other improvements. Sellers may sell unfinished lots without utilities installed or grading completed (often referred to as "paper lots"); lots with all dry utilities installed and wet utilities prepped, with all master grading completed and the building pad ready for construction of the dwelling unit thereon (referred to as "finished lots"); or lots that fall somewhere in between.
Real estate investors investing in MPCs can often finance the construction of certain public infrastructure, such as roads and utilities, within the community through the creation of special assessment districts (which may be known in different jurisdictions as "community facilities districts" or "municipal utility districts") and the issuance of municipal bonds. Municipal bonds offer lower interest rates compared to other financing options. Sellers often carve out any future reimbursements from these assessment districts from the sale price if the applicable infrastructure is installed by the seller. If the builder is completing the infrastructure, sellers can alternatively assign assessment district proceeds to the builder.
Buyer and Seller Release and Indemnities
To address increased risks of liability claims associated with the development and construction of residential housing, sellers typically push for a release from the builder for any construction defects at the end of each phase. The parties typically complete a site inspection prior to each closing, at which time the builder has the opportunity to inspect any work performed and identify any defects that should be addressed by the seller prior to the closing.
Sellers will also seek a broad indemnity from the builder against third-party claims by homebuyers and homeowners' associations alleging, among other things, damage caused by defects in the design, construction, engineering, or sale of the homes and other improvements constructed on the lots. In addition, in some jurisdictions, a seller may require the builder to indemnify such a seller from claims that arise from work performed by or on behalf of the seller. To mitigate the risk of taking on such an indemnification obligation, the parties will often negotiate nonexclusive assignments of guarantees, warranties, and rights against the contractors and subcontractors who performed the improvement work on behalf of the seller. In addition, given that filing a lawsuit on an indemnity may be expensive and time-consuming, sellers will often mandate that builders maintain certain insurance coverages in connection with the construction and development of residences and that they be named as additional insureds under such insurance policies.
Assignment and Land Banking
Builders frequently negotiate specific assignment rights in builder PSAs to facilitate arrangements for land banking. Land banking arrangements are a form of off-balance-sheet financing that many regional and national homebuilders employ. In such arrangements, land is transferred for consideration to an entity that holds title on behalf of the builder, with the builder retaining the right to buy back the land when the builder is ready to start development work. Most homebuilders do not use traditional mortgage financing to acquire and develop residential lots, so sellers often accept and accommodate land banking arrangements with certain protections. Sellers generally require the land bank to enter into a land banking agreement with the builder that formalizes the land banking arrangement, including the builder's right to develop the property and the builder's option to purchase the property from the land bank pursuant to an option and development agreement; the land bank to assume all of the builder's liabilities and obligations under the builder PSA and ancillary documents upon taking title to the transferred property; the builder not to be released from any of its liabilities or obligations under the builder PSA and ancillary documents through the term of any land bank arrangement; and the builder to be prohibited from selling, conveying, assigning, exchanging, or otherwise transferring its interest in the option and development agreement, unless (i) the builder gives the seller advance written notice; (ii) the builder and its assignee execute an acceptable assignment and assumption agreement; and (iii) the builder's assignee remains in compliance with the builder's representations and warranties in the builder PSA. A land banker will typically refuse to assume development obligations, so the builder often retains those liabilities and obligations pursuant to the option and development agreement with the land bank.
Conclusion
MPCs as alternative residential investments are gaining increased interest from commercial real estate investors. For investors, MPCs can offer a compelling option for diversification and capitalization on changing housing demands.
While these particular assets offer a potentially promising and exciting future for real estate investment, the uniqueness of these assets and variety of ways to structure the deals to meet individual seller needs, compared to that of traditional asset classes, are important to understand to ensure that investors fully realize all of the possible options in structuring these deals.
Footnotes
1. National Investment Center, "Senior Housing Pricing Strategies Diverge in Late 2024" (Feb. 20, 2025); Multi-Housing News, "The Road Ahead: Senior Housing Trends to Watch in 2025" (Dec. 18, 2024).
2. National Association of Home Builders, "Nearly 75% of U.S. Households Cannot Afford a Median-Priced New Home in 2025" (Feb. 2025).
3. Grand View Research, "U.S. Active Adult (55+) Community Market Size, Share & Trends Analysis Report By Gender (Women, Men), And Segment Forecasts, 2023 – 2030" (2024); The Courier, "Montgomery County sees more homes, biotech district and parks with new developments" (May 4, 2024).
4. United States Census Bureau, "Sun Belt Cities and Towns Led Nation in Population Growth" (May 16, 2024); Hilldrup, "From Cities to the Sunbelt: Where Are People Moving in the U.S. in 2024?" (July 22, 2024); Clarion Partners, "The U.S. Sun Belt's Ongoing Boom" (Apr. 26, 2024).
5. National Association of Home Builders, "Single-Family Permits Up in October 2024" (Dec. 16, 2024); Mortgage Orb, "Texas Led the Way on New Home Construction in 2024" (Feb. 10, 2025); NYC Data Science Academy, "Housing Supply On Fire in America's Sun Belt" (Jan. 14, 2024).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
