Advice on Syndication Structure with Developer

[Khizar Hanif]

Hey all, 

I am looking for some advice on how to structure a partnership with a developer. The developer will be doing all the "work" from identifying the site, land acquisition, and bringing the project to completion/disposition. I will be bringing all the equity or "money" to the deal-by raising capital and perhaps investing some of my own into the deal-ideally raising 90% and investing 10% of my own. 

The developer wants 50% of the equity as their ownership while they will be giving 50% to the equity ownership/investors. Note-they are owning 50% as their "sweat equity", and will not be contributing any capital. 

At disposition, 50% of the net proceeds will be distributed to investors and 50% to the developer. In addition, the developer will charge a developer's fee, administration fee, and a guarantor fee. 

The developer is the builder, so we cannot ignore the fact that they will be marking up their construction cost and making a nice profit there as well.

I am tearing the deal apart to figure out how much the developer will be making and how much I should be making as a syndicator bringing capital to the table. 

Here is an example of a deal:

9,200 sq ft Retail Development

• $3,400,000 Total capital required
• $866,000 Equity (raised by me)
• $2,534,000 Debt
• $4,400,000 Sales price 
• $220,000 Closing costs
• $2,534,000 Debt repayment
• $80,000 Developer fee
• $80,000 Guarantor fee
• NET FROM SALE $1,486,000
• $866,000 Equity repayment
• $138,560 Pref for 2 years (8%/year)
• $481,440 Remaining funds to distribute
  • From here 50/50 split to developer and investors
  • $240,720 to developer
  • $240,720 to investors

43.7% total return on investors equity

Now, for sources and uses:

• $85,000 Architect/engineering 
• $65,000 Permits/Platting
• $1,400,000 Construction costs (this is where they would be squeezing some nice juice for themselves)
• $50,000 Administration fee
• Other sources and uses but not going to list all...

At a $1,400,000 construction cost, and with the permit/engineering/design fees I would expect a ~$400,000 profit for the builder. 

• Taking all of this information, the developer will be making ROUGHLY...
• $400,000 Construction profit 
• $80,000 Developer fee
• $50,000 Admin fee
• Going to leave out the $80,000 guarantor fee since that can go to anyone who guarantees the loan
• Total- $530,000 before the deal even sells
• $240,720 additional profit after the deal sells
• TOTAL $770,720 profit for the developer on this deal
• $850,000 if they guarantee the loan.
  

Now, out of the $770,000 that the developer is making on this deal, how much of that should go to me? I would be bringing all the equity, and essentially increasing the developer's resources and network to tap into for future deals, which is valuable in itself. The developer wouldn't have any involvement on the investor's side, I would be managing the investors and relations. I'd like to determine a fair structure for this developer and myself to create a healthy and symbiotic relationship and start doing deals together. 

Any advice/ideas/negotiation points would be appreciated. Thanks!

[Greg Dickerson]

Originally posted by @Khizar Hanif:

Hey all, 

I am looking for some advice on how to structure a partnership with a developer. The developer will be doing all the "work" from identifying the site, land acquisition, and bringing the project to completion/disposition. I will be bringing all the equity or "money" to the deal-by raising capital and perhaps investing some of my own into the deal-ideally raising 90% and investing 10% of my own. 

The developer wants 50% of the equity as their ownership while they will be giving 50% to the equity ownership/investors. Note-they are owning 50% as their "sweat equity", and will not be contributing any capital. 

At disposition, 50% of the net proceeds will be distributed to investors and 50% to the developer. In addition, the developer will charge a developer's fee, administration fee, and a guarantor fee. 

The developer is the builder, so we cannot ignore the fact that they will be marking up their construction cost and making a nice profit there as well.

I am tearing the deal apart to figure out how much the developer will be making and how much I should be making as a syndicator bringing capital to the table. 

Here is an example of a deal:

9,200 sq ft Retail Development

• $3,400,000 Total capital required
• $866,000 Equity (raised by me)
• $2,534,000 Debt
• $4,400,000 Sales price 
• $220,000 Closing costs
• $2,534,000 Debt repayment
• $80,000 Developer fee
• $80,000 Guarantor fee
• NET FROM SALE $1,486,000
• $866,000 Equity repayment
• $138,560 Pref for 2 years (8%/year)
• $481,440 Remaining funds to distribute
  • From here 50/50 split to developer and investors
  • $240,720 to developer
  • $240,720 to investors

43.7% total return on investors equity

Now, for sources and uses:

• $85,000 Architect/engineering 
• $65,000 Permits/Platting
• $1,400,000 Construction costs (this is where they would be squeezing some nice juice for themselves)
• $50,000 Administration fee
• Other sources and uses but not going to list all...

At a $1,400,000 construction cost, and with the permit/engineering/design fees I would expect a ~$400,000 profit for the builder. 

• Taking all of this information, the developer will be making ROUGHLY...
• $400,000 Construction profit 
• $80,000 Developer fee
• $50,000 Admin fee
• Going to leave out the $80,000 guarantor fee since that can go to anyone who guarantees the loan
• Total- $530,000 before the deal even sells
• $240,720 additional profit after the deal sells
• TOTAL $770,720 profit for the developer on this deal
• $850,000 if they guarantee the loan.
  

Now, out of the $770,000 that the developer is making on this deal, how much of that should go to me? I would be bringing all the equity, and essentially increasing the developer's resources and network to tap into for future deals, which is valuable in itself. The developer wouldn't have any involvement on the investor's side, I would be managing the investors and relations. I'd like to determine a fair structure for this developer and myself to create a healthy and symbiotic relationship and start doing deals together. 

Any advice/ideas/negotiation points would be appreciated. Thanks!

First thing would be to discuss with an SEC attorney to make sure you are properly and legally structured to raise capital for the deal. Once that is squared way it sounds like a fair structure is for you and the developer to split the profit on that side 50/50 if everything is as you have described. 

The fact that they self perform as GC is not an issue or serious upside for them as you would need to hire a GC anyway if you were just the developers so there is not a significant advantage from a profit standpoint that is unfair to you as long as the costs and fees are commensurate with the market. Its a lot of work and overhead cost to build these buildings.

Typical overhead and profit for a GC on a commercial projects like this is 20% with 10%-12% or more depending on jurisdiction going towards overhead and general conditions. The GC will be doing good to net 10% before taxes so its not as great as it sounds. Best case they make $140k in net profit before tax.