What is my percentage in building new multifamily with a partner

Question

BP,

I'm an Architect. I'm good at that. I get permits fast and have nice designs. One of my clients is a developer and is good at finding properties and running the numbers (not good at that). I like that he is conservative and patient. He found a lot and we have decided to team up to build a multifamily building containing 18-22 apartments. We are still working with zoning but the initial numbers were based on 15 apartments. So already we are ahead of our initial concept that provided cash flow. The idea is to hold onto the property for at least 10 years collecting rental income. After that, we would be open to selling.

How do I figure my worth as a percentage in this partnership and make sure I get a fair deal during the next 10 years and when we eventually sell? Whatever we agree too I will have a lawyer look at it before I sign anything. Any recommendations for a lawyer in the DC area?

My normal fee for this type of project would be around $80k which I would collect throughout the design and construction process which would last 18-24 months. My investment is my time and obviously charging no fee. I would also be doing about another $30k of additional work to coordinate everything during construction as I would be acting as a construction manager.

My partner is also investing his time, some money and we might have to find an outside investor. Once we have more detailed construction budget (2-4 weeks) that will be determined.

Hopefully that was enough information to get some feedback. Thanks BP!

Chris K. · Answer

@Eric Teran

There are many ways to structure such arranagements. But as a general rule, I'm not a big fan of sweat equity arrangements. It can invite odd tax consequences and also raise fairness issues down the line. Instead of dealing with sweat equity, I would suggest that you guys form an LLC --- another topic --- and you charge the LLC for your time and work. You can then enter into an agreement with the LLC for a reduced rate and agree to other arrangements (e.g. holding off on your payments until end of the project, providing further discount based on the ultimate outcome, etc.). Your partner can have similiar arrangements as well depending on the professional services he provides.

The basic underlying concept is to separate the ownership/entrepreneurial spirit side from the techinical day-to-day work that you guys need to do.

On a related note, I would try to avoid a 50-50 partnership/ownership. That can also cause a lot of issues down the line.

Good luck!

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Russell Brazil · Answer

Where is the cash coming from and whats the cost of the project?

Scott Mac · Answer

@Eric Teran

Hi Eric,

It seem to me that Mathematically (although it's not your strong area),

If it were me, I'd initially think about:

• cash flow from operations %
• % of the sales profits (or losses)
• Over all management of the LLC decisions %.

For cash flow from operations

It seems logical to start with your $100,000 in billable fee's; then

take the total of all of the "Present Value's" of all of the projected cash flow distributions for the next 10 years for the property. (A CPA should be able to do this in Excel easily--for a fee); then

see what % of that total is equal to your fee's. Then MAYBE use that % as the very bottom of the % of cash flow distributions you would get. (you need to think whats fair to both guys and you don't want to give everything away either).

Now for your % of sales profits, the sales price is directly related to:

market conditions (uncontrollable) = RISK,

Property management results (controllable by the property manager) = RISK to you because YOU are not the manager.

It seems logical (to me) without any other information though, that 50% / 50% would be fair here.

As far as LLC control regarding decisions 50% / 50% with some method to break a tie vote if that ever happened.

There are a lot of other things that come into play in this, and it's best to have an attorney draft up your agreement and walk you through all of the decisions that need to made on this.

That's just a quick off the cuff discussion, an illustration of what could be possible, (you really need to figure this out for yourself, and with an attorney, because this is BIG MONEY over time, and also talk to your CPA because the decisions you make could have adverse tax consequences for both of you if your not careful).

Good Luck!

Brian Ploszay · Answer

If you are a minority partner, you may have to still sign on any construction loan and permanent loan.  If there are losses to the loan, you may be liable for the entire repayment of the loan (in theory).  During the downturn, lots of minority partners got burned when the sponsor went bankrupt.  The minority partner was served with a foreclosure and earned the deficiency.

Definitely shoot for a non-recourse agency loan when you finish this project.  For the construction loan, you most likely will be fully liable.  Or, try to earn your equity and then go onto the final loan, avoiding signing any construction loan.

Brian Ploszay · Answer

@Eric Teran   The size of your deal may qualify you for that loan.  Only way to go for larger deals.  The deficiencies in a failed deal of that size may be larger than your net worth.  That leads to a bankruptcy scenario.

Eric Teran · Answer

@Brian Ploszay thanks for the heads up on being liable. I like what I read about a non-course agency loan. Are those hard to obtain? I will be careful on signing any construction loan.

Eric Teran · Answer

@Scott Mac thanks for the advice. All of this is valuable. I knew I have to talk to an attorney but didn’t even think about my CPA. I will give him a call.

Eric Teran · Answer

@Russell Brazil the total budget (construction, soft cost, permits, loan closing, etc) is a little under $3 million. It will be around $187 SF. The basement will be Superior Walls and the above grade is all modular. It will be 6 modular units per floor for a total of 18-22 modular units which gives us 19 above grade apartments plus three more in the basement. Our big cost is Water and sewer which will be around $100k.

Our construction schedule is 6 months and I believe we will hit this mark do due everything being modular. Site work will tal 4-6 weeks, the modular units will be placed in a week, and then another 12-16 weeks for finishes, final grading, landscape, etc.

The good thing is that there is an existing house on there that we will rent out during the permitting process. During that time we will not be losing any money.

Getting to money my partner is taking care of buying the house/lot. Depending on the ARV we will look for an investor. With the conservative estimate we will need an investor and he knows a few people in the area and I’m sure if we need to I would ask the BP community.

Eric Teran · Answer

@Chris K. Thank you for the quick response. I definitely like the idea of forming an LLC. I will bring that up to my partner as well as dicussioning other options rather than sweat equity. Thanks again!

What is my percentage in building new multifamily with a partner

Most Popular Reply