Devising a fair partnership / joint venture with contractor

[John O'Brien]

Need input for a fair structuring of a deal with local contractor. A trusted contractor has brought a great multi-family apartment deal to me at a discounted price. He will do the work at cost to keep his crew working and obtain equity in the building.

to put the deal into a $1,000,000 example for ease of math...

vacant building acquisition cost $130,000

rehab quote at contractors cost - $550,000

total cash needed - $680,000.

value when fully rehabbed - $1,000,000

for comparison...

vacant building wholesale worth $200,000

rehab work value (regular contractor rates) - $800,000

total cash needed if done conventionally $1,000,000

Contractor does not have funds to make deal happen. I would need to put up all of the funds to make the deal work. Contractor would guarantee that he would cover any cost above the $550,000 noted.

I want to arrive at a fair treatment for this deal. The deal creates about $320,000 of built in equity.

would a fair approach be to split this equity - and give the contractor about 16% shares in the building?

would a LLLP holding entity make sense ?

Greatly appreciate thoughts on this one

[Joel Owens]

My question would be what your cash liquidity is??

Putting in almost 700k cash for an upside of 1,000,000 is a huge risk to you especially if that takes up most of your cash.

Hard money lenders do not like to give loans on completely vacant properties. I know you mentioned paying cash but better might be to find an apartment 50% occupied. There are better loans and the turn around is faster. You have a high interest rate loan but you use the cash flow of the building to offset it and keep your cash for reserves. Then you refi or sell off once creating the new value.

The 1,000,000 the contractor says they will cover any overruns more than 550,000 but you can't be promised that for sure. You have to make sure your rents will be in the bottom 50% for the market to lease up fast and get the best tenants. You also need to make sure the tenant base of the area isn't bad. You want a vacant building in a good to great area. If you rehab in a bad one and make new again the tenants there tend to pay a few months and then trash the rehab and you take a big loss. Talk to hard money lenders in your area and they will give you a block by block account of the local surroundings. If they will not lend there take notice because many HML's use to do the exact project you are describing and are coming from the school of hard knocks.

The value might not be 1,000,000 like you think until you nail down the rents for the area. If rents are lower than thought to get stabilized and rehab costs are more than most of your profit goes away.

If you could get hard money for this with a non-recourse loan or no personal guarantee and only put in say 100k to 150k and it doesn't work then you walk away. If you have to dump in almost 700k I just don't see the upside justifying that risk level.