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Updated over 7 years ago,
How to Structure Investor/Developer Profit Split?
Hello BP Forum Members.
My wife and I build homes in the Los Angeles South Bay area. Technically these are remodels, but I say "build" because the existing house is take down to the foundations, and we start from what is basically dirt.
A buyer of one of our previous projects is interested in doing joint ventures with us. And I am trying to come up with what I think is called a "waterfall" profit sharing schema. Note that our investor would provide only financing. We would handle the acquisition, design, project management, some of the contracting, and the sale.
It stands to reason that the waterfall would be based on the portion of risk assumed by each party, as well as on the amount of work done by each party. But how to determine the split?
Being an engineer by training, it is my instinct to examine the limiting case. Say the investor funds everything (purchase and build costs), and we do all the work (the architectural design, interior design, landscaping design, project management etc.). Since in this case the investor is taking all the risk, and we are providing a service really, would our return be based on some percentage of the build cost? Like an architect or a contractor? Maybe 30% of the build cost?
But, what if the investor funds the purchase of the home, and we fund the build (borrow 75% of the build money with a 25% down payment on that loan). Now we've taken on some of the project risk, so we should be privy to some portion of the profit. Maybe that's just a simple split based on the portion of the total project cost that each party brings to the table? But we still make the % on the build cost like an architect?
Hopefully my question is clear. I'm not looking for absolute answers. Just ideas and/or examples to help think this through.
Thanks in advance for any input...