The Community Land Model version 3 (CLM3.0) simulates land‐atmosphere exchanges in response to climatic forcings. CLM3.0 has known biases in the surface energy partitioning as a result of deficiencies in its hydrological and biophysical parameterizations. Such models, however, need to be robust for multidecadal global climate simulations. FLUXNET now provides an extensive data source of carbon, water and energy exchanges for investigating land processes, and it encompasses a global range of ecosystem‐climate interactions. Data from 15 FLUXNET sites are used to identify and improve model deficiencies. Including a prognostic aquifer, a bare soil evaporation resistance formulation and numerous other changes in the model result in a significantly improved soil hydrology and energy partitioning. Terrestrial water storage increased by up to 300 mm in warm climates and decreased in cold climates. Nitrogen control of photosynthesis is revealed as another missing process in the model. These improvements increase the correlation coefficient of hourly and monthly latent heat fluxes from a range of 0.5–0.6 to the range of 0.7–0.9. RMSE of the simulated sensible heat fluxes decrease by 20–50%. Primary production is overestimated during the wet season in mediterranean and tropical ecosystems. This might be related to missing carbon‐nitrogen dynamics as well as to site‐specific parameters. The new model (CLM3.5) with an improved terrestrial water cycle should lead to more realistic land‐atmosphere exchanges in coupled simulations. FLUXNET is found to be a valuable tool to develop and validate land surface models prior to their application in computationally expensive global simulations.