Seeking Insights on LP/GP Split for San Diego Backyard Development

[Andrew Erickson]

Hello BiggerPockets Community,

I'm doing an exciting project in San Diego and would love to get your thoughts on structuring the deal. We're developing units in the backyard of a property, with the numbers looking promising:

• Purchase Price: $1M
• Construction Costs: $1M
• Cost of Capital: $200K
• After Repair Value (ARV): ~$3M
• Projected Profit: $500K - $1M
  Timeline: 9 months

To finance this, we're raising $500K in equity and securing $1.5M in debt. I'm considering a structure where Limited Partners (LPs) receive a 10% preferred return, with profits split 50/50 between LPs and the General Partner (GP) thereafter.

I'd appreciate any feedback or insights on this proposed split. Is the 10% pref and 50/50 split fair given the risk and potential reward? Any advice or experiences you could share would be incredibly valuable.

Here is what likely returns are for investors:
$500k profit: LP returns 53% in 9 months. 
$1M profit: LP returns 102% in 9 months.

Thank you for your input!

[Dan H.]

I have never been a LP on something this small, but on bigger projects the GP charge an acquisition fee and mgmt fee, but their profit share is no where near 50% (possible exception for far exceeding projected return then GP get larger percentage of profit above the expected return.

I am unable to tell the GP capital commitment.  I never invest if the GP does not have a significant capital investment.

In some ways I like that there is no acquisition fee and no mgmt fee and that the GP only benefits if the project makes money.  However, the GP must have capital invested.  The percentage to GP seems way too high especially if the GPs have no capital invested (LPs have all the risk).

good luck