Need Help With New Development Partnership Structure

[Jason K.]

Hello,

Need help with structuring a partnership and thought I'd finally reach out to the amazing folks at BP for help.

I'm looking to partner with a developer who is looking for capital to fund some more projects. His role would be the finding of the deals & overseeing construction. My role would be to raise 100% of the capital and keep the investors happy. I can also manage the sale of the property. In this type of scenario, when it comes to the Developer-side profits, is it normally a 50/50 split between the developer and myself?  I know every deal can and should be different but if the roles were split like this cleanly, is this a reasonable way to structure the partnership? Thanks so much for listening.

[Bryan Hancock]

You'd be wrong about that.  This will clearly be a securities arrangement and you need to work within the confines of the law to avoid inordinate amounts of risk if the deal goes sideways.  If all goes well nobody ever complains.  If things go the slightest bit bad then you'll be glad you sought the advice of a securities attorney.

A typical split among the promoter side and the LPs will be something like:

1.  6-10% preferred return

2.  Some split thereafter

Smart syndicators do a match, or make-up return to keep things in balance provided there are enough dollars to go around.

From there you'd need to figure out how to share the split the GP or managing entity takes among you and the person performing the developer role.  The amount your item 2 for the split above will depend heavily on a number of things:

3.  How good the deal is

4.  How good you are at negotiating and selling yourself

5.  How many investors you can find

6.  What value you add

7.  Your track record, internal controls, and safety margin

8.  Etc....(Could go on for a long while)

The deal language is very important and a single-purpose entity for something like this is something you need an expert to help out with.  This is not a do-it-yourself type project to put these documents together.  

With better details and more precise numbers people can probably give you a better sense for how to structure things.  Keep in mind that at the end of the day it will all boil down to what you can sell and how much the investors believe that you can pull it off.  Given that this is a new team that is unproven and hasn't worked together you're likely to have to give away more of the deal than you would if you had a proven track record making things work together.  This may be partially influenced by your existing relationship with your investors, but for every one investor that claims they'll invest there are many that ultimately won't when they have to sell their spouse or other naysayers telling them things will go wrong.  Investors will frequently seek advice from people close to them and they'll look for reasons NOT to do the deal.  The PPM will also tell them hundreds of reasons why they shouldn't do it.  If you can clear these hurdles and structure something that will sell to investors you're doing better than most folks out there. 

Knowing almost zero about your deal I would say you're probably looking at giving away in excess of 60% of the profits to the LPs.  Are you putting in funding of your own?  This will be a question that will get asked.  If not, they're likely to want more of the deal.  Post some numbers and we can hopefully help you to craft something that is fair to all sides of the deal and will sell.