Equity Structure for Big Build in San Diego

[Andrew Erickson]

Hey BiggerPockets Family,

I'm diving into a new venture in San Diego and could use your expertise on the financial setup. Here's the breakdown of our project:

• Acquisition Cost: $1M
• Build-Out Expense: $1M
• Financing Overhead: $200K
• Projected ARV: Around $3M
• Estimated Profit Margin: $500K to $1M
• Timeline: 9 months

We are raising $500K from equity investors and taking on $1.5M in debt. I'm leaning towards offering our LP investors a 10% preferred return, with any remaining profits being divided equally between LPs and the GP.

Would love to hear your thoughts on this arrangement. Does the 10% pref with a 50/50 profit share seem equitable given the project's scope and profit potential? 

Here is what likely returns are for investors:
$500k profit: LP returns 53% on capital in 9 months.
$1M profit: LP returns 102% on capital in 9 months.

Looking forward to your feedback!