Joint Venture with builder. 50/50 but I put all the cash, fair?

[Aris Alexiou]

Hey guys,

I talked with a builder earlier today about my desire to have him built some duplexes for me. I have around 350k liquid ready to deploy for buying land and securing a construction loan. He told me that he prefers to partner up on something like this and instead of charging a fee, he wants to have equity. It was an informal conversation (nothing on paper, we agreed all this is going to be done thru LLCs and Joint Venture agreement with everything spelled out but we haven't gotten there yet), but from what I understood, he wanted to be 50/50 partners when all is said an done.

He mentioned it was going to be about $125/sqft to build at cost, no fees, and when I asked how much would it be if he was charging me a fee, he said approx. $190/sqft.

I would be putting all the cash (as I understand) to buy the land and secure us a construction loan. Does that 50/50 sound fair? Wouldn't the actual fair deal be more like the following:

Total Project Cost: Land Cost + Construction Cost + Fee

If I am putting all the Land Cost + Construction Cost then I need to have equity equal to the percentage of those 2. If per the numbers I gave the above, his fee is around 35% of the cost to build / sqft then he should have 35% - Land Cost in equity.

Thoughts? Sorry my for me syntax, English is my second language.

[David M.]

@Aris Alexiou

"Normally," myself and other don't consider this a fair deal.  Investors make money from the PROFIT of their capital.  Workers/employee earn money from a job --- they can't lose money and they have nothing at risk.  Investors, on the other hand, can lose money have their capital at risk.

I guess one would need to know what are the price points you are looking at.  His 35% reduction in cost is attractive.  I'm not sure what you are saying are proposed profit breakouts.

MAYBE a way to do it is after the property is sold, you get all your equity back and then the two of you split the profit 50/50.  If for some reason there is a loss, he has to put up half the loss to use --- basically the 50/50 split goes both ways.  

With my suggestion above (which I think is what your builder is suggesting), you need to run the numbers.  I think in a perfect world it will work (depends on your price points) for both you.  That is, he will make more money but you will also make more / spend less money.  the risk isn't balanced, but if its a solid deal it may be okay.  Some provisions may need to made to cover your down side risk.

I hope that helps.  Good luck.