GC Partnership Advice

[Ray Hayward]

Hello, I am looking to partner with a General Contractor on a project. The conversation has been based on the exchange of “Sweat Equity” for Partnership Equity. I am looking for advice on how to make the Contractor a fair offer. Outside of GC services, he does not intent to put cash in the project. The GC believes his costs will average around 30-33% of market value as his reasoning for pricing is 33% Material, 33% Labor, 33% Taxes.

What is a reasonable % of equity you would offer a GC? Also, I would want to make it incentive based including hitting Timeline, Budget, Other? Do you agree?

I look forward to your general feedback and recommendations. 

[Milton Rivera]

@Ray Hayward

I would start by defining a scope and creating an actual budget for the work to be performed.   Doing a full-blown rehab is one thing, doing a quick cosmetic turnover (replace carpet and paint) is another.   By defining the scope you can both agree on what needs to be done and create a budget, you can plug that number into your calculation and determine what the actual value is.  The average cost varies by trade and the type of work being done.  Two quick examples:

Changing a toilet

Labor = Assume 3 hours at $50/hr = $150

Material (wide range, assume something cost effective) = $150

This looks like a $300 job and a 50-50 split in labor/material 

Painting the interior

Materials = $500

Labor = crew of 4 x 8 hrs x $30/hr =960 (Assume 1,000)

Total cost  = $1,500 (Material 33%, Labor 66%)

In general, I agree with adding incentives in order to complete the work.  On projects, where the GC is supplying the material/labor and carrying the cost the incentive is to get the work done ASAP in order to sell and recoup the investment.   There are other things to be taken into account when determining an equitable split, including:

• Who found the deal?
• Who is financing/putting the down payment & closing costs?
• What is the extent of the renovation (how risky is it)?
• What is the total estimated turnaround (from acquisition to selling), how long does will funds be tied up?
• Who is on point to market and sell it?