Sweat equity valuation for permitting and remodeling a commercial building - Help

[Iliya Muzychuk]

Hi, 

As an architect, I was approached by the building owner to help increase the value of their building and create a cash flow. The current value is 500k (the Owner has 400k ballon in 18 months), and with 150k remodel I believe I can generate about 5.5k a month gross income. I am going to take on the development, permitting, contracting, and marketing of the building to create two live-work spaces. 

Since this is my first type of sweat equity deal, I have difficulty realizing what percentage I should take and from which portion (Gains, Full building valuation, Cash flow). 

I have two options in this scenario: 

1. Sweat equity only, my labor for %. 

2. Paying the construction costs as cash. 

Wondered what the forum would think about this deal and how should I structure this distribution. I am confident on delivery but pretty new to being on the developer side of things. 

Help would be greatly appreciated! Thanks and have a great day! 

[Kristi Kandel]

Quote from @Jared W Smith:

As a fellow licensed architect, I am interested as to how this plays out. I have thought about the same scenario but pondered how to structure it. I will follow this.. 

 Each project is deal specific. What I suggest if you have income covering your overhead on other deals to offer to developers/owners the option of a deferred fee. You say my fee is X for this project. I'll agree to defer my fee to construction loan close but by doing so my fee will be 1.5x or 2x (depending on how long entitlements / permitting takes). 

OR 

Another option is to say I'll defer my fee for equity. Typically that means you'd take your fee and see what that dollar amount is vs the other equity going into the deal and determine a % from there. If you bring cash on top of that your equity piece would increase accordingly. That's the easiest way to determine it. However, you can get more sweat equity if you also take on more of the active roles & responsibilities. There is value there and that's where the equity % gets grey on how you structure it. 

That then depends on who your partner is, what returns make it worth it to both parties, who has the most experience, who found the deal, who brings the relationship piece for finding the deal, executing agreements, finding tenants, lender partners, etc. 

I would caution everyone from taking only equity from a developer/owner/partner you've never worked with. I'd start with the deferred fee scenario and after a relationship and trust is built THEN go ahead and consider an equity partnership. Those partnerships are sometimes more intense / complex than an actual romantic relationship and you really need to vet your partners prior to going in on a deal.