Help with JV partnership opportunity

[Ken D.]

Hello,

We have been long time readers of the BP site and have found a wealth of information. We have a single 12 unit property which has been in the family for a while. We have taken over the business for now what is 1 year and are excited about the future. We were proposed an opportunity on our first multifamily property and we could use a bit of information.

We were presented an opportunity to enter into a JV partnership and need advice on how to structure the partnership. Would like to hear any advice/help you wonderful folks at BP have to offer.

Developer wants to take out loan with us for costs to rehab of our 12 unit multifamily to improve value in order to sell (approx 200k loan). Developer will deal with construction and we will be responsible for regular operating of units. Developer to repair exterior and update 4-6 units. In a scenario like this, should the profits be 50/50? Developer would be making approx. 250k after sale if splitting 50/50. Does this seem like a fair amount? We understand that we are paying for developers time and experience but it seems excessive for the amount of work being done. What would be a reasonable split? 

[Chris Winterhalter]

@Ken D. 

How well do you know the developer?  Are they know around town?  Do they have a good reputation?  How long have they been in business?  Do they have a proven track record with projects like these? 

If I were in your shoes I would...

• Network with the real estate brokers in town that understand and your size and type of product.  Having a really good successful broker can go a long ways.  Look at the national presence shops like CBRE, Cassidy Turley, Marcus & Milichap, Hendricks & Partners, etc.  But don't leave out the local commercial real estate brokerage firms.  Check loopnet in your area to see what broker has the most listings between 5-50 units.  Talk to other investors.  You are going to want a good broker to help you evaluate the as-is & after repair value of the building.  
• Is the building self managed?  If so I would connect with a really good property manager in the area.  Talk to them about rents, operating expenses, vacancy, turnover etc etc.  You might end up having the building professionally managed.  Either way it will help you evaluate your projections.  
• Talk to local commercial real estate appraisers about your plan.  Is the financing bank going to perform an appraisal based on the projected value of the building? If so then this would be a good opportunity to talk to the appraiser handling the work. 
• Talk to several really good GC's in your area who have a solid portfolio of similar product.  Similar product and design that will yield the highest return.  Get 3-4 bids from General Contractors and spend the time going over the bids and scope of works.  

If after you talk to all of these people you still want to partner with the developer you will be more than informed.  This will allow you to manage the developer with a lot more knowledge.  The developer could have the best intentions however you need to verify all costs and projections.  Good luck!