Joint Venture with builder? 50-50 but I put all the cash? fair?

Question

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.

Patrick Fitzgerald · Answer

F that, hire a builder.

Pavan Sandhu · Answer

Lots to consider and many possibilities. If the guys building at cost and co signing on the construction loan and all you have to do is bring the money for the land then it COULD be a good partnership.

Kyle H. · Answer

@Aris Alexiou

Just for context everyone is making sense, however I have been on the builder side of a 51/49 split of a similar situation.  However the investor deploying the capital got 5% on all $ loaned to the project.  In a real world example for me with a 67k net after financing my % ended up around 33% if you add the financing proceeds back to the investors total (the investors return was 18% COC and basically all they did was write checks).  You need to decide if you want to do the project yourself which would obviously be cheaper, or bring someone to the table to earn their portion of the deal, and determine if you could have a more passive investment with less return or more active with higher return.  I would absolutely not do the deal this way unless you were getting 5-6% on any money loaned to deal, have at least 51% ownership and a high level of confidence with the person you are doing business with.  As an aside this structure was pitched by the investor to my partner and I as we had an existing relationship with him, he wanted to be completely hands off and we had a return that we estimated for the project that fit his comfort level for the amount of capital deployed in the way we set up the deal.

Mike Wood · Answer

@Aris Alexiou  That make zero sense.  Walk away and find a builder.  Your taking all the risk and willing to give up 50%?  That's just stupid.  Since you clearly have to capital, just hire a builder and own 100% of it.  I also think this guy is giving you a load of crap, his GC fee (based on his numbers) is 35%, which is just crazy talk.  I would not expect any more than 20% on a custom build, when you are funding the entire project.

Rick Albert · Answer

Where is his risk in this and his contribution? It sounds like if he is putting in his "fee" of 35% then that would be the equity share. But even then you might find a contractor for less and you keep 100%. If you have enough projects you could get a contractor down to 20% or so (maybe less if the project is big enough).

Alternatively, you secure the financing to buy the land, and he covers the construction costs 100%. Your down payment might be equivalent to what he would be spending on the construction.

If he wants 50/50, then he should contribute 50% of the costs (even if it is his fees included because you would pay for that with someone else). So really it would be another 15% or so of his own cash.

Joint Venture with builder? 50-50 but I put all the cash? fair?

Most Popular Reply