Investing with contractors

[Ben Ahrens]

I am interested in developing new apartment complexes (8plex or smaller for now). Key contractors on the job would be receiving equity and correlating cashflow instead of payment for their labor. I plan on working it similar to a syndication: I would be the general partner with my contractors being investors. I would therefore have control over the property and how it is managed, even though we would all have an equity stake in it. To summarize, the process would have two phases: 1) Construction phase, 2) Management stage. I think...During stage 1, the laborers' money would be set aside in an account until completion. Then, upon stage 2 (completion), the money in these accounts would be invested into the property, which would be applied to the principle of the mortgage.

Legally speaking, what would this type of relationship be called? I don't think a "Syndication" would work because my limited partners would not meet the criteria of an investor. Is there another type of legal partnership that would work for this dynamic?

Also, what type of lawyer should I talk to? If you're lawyer, reach out to me!

[Lynnette E.]

If you have the money to pay the contractors and are just putting that money into an account, to later pay down the mortgage it appears that you have the funding to build.  So it might be  a much better structure to just pay the contractors.  Then when the apartment is complete sell partnerships in the building to pay down the mortgage.  Then you can sell the partnership to whoever wants it.

I think it would be very difficult to find any contractors wishing to invest their time to maybe get a piece of something, if it ever is completed.  And they are taking a risk that they are not buying into something that is upside down.  I would also think that any contractor doing this would want a name on the deed, so that makes the deed a mess as you add a new contractor when they do the work because if you add them before they do the work, they may never work.

Most of the decent contractors have a waiting list to get them to work for you, and they can be picky on who they work with.  And most want money for their work.  They have subs to pay and the subs want to be paid too--they have families to support.

Also, you are an unknown to them, why would they want to partner and do work with you?  Do you have a track record of building?  Managing construction funds?  Filling new apartments with tenants?  Managing a new building start up and all the issues with new construction?  Managing tenants?  they would want to know taht they were getting gold star experience from your background to buy into this.