Waterfall Framework for determining equity shares w/ someone else

[Dolly Caswell]

Hello BiggerPockets, I have a problem! I'm experienced enough to have had a few "almost disasters" due to contractors bad work/failure to finish/cheating me in rehabbing a condo as well as work on my home. A couple of them I originally thought we could have worked together long-term, but after  our misunderstandings on that project, he did the work (not always great), I paid the bills, but his promises vs my expectations just didn't match up. My problem, I'm sure. Just so you know I've even had a contract a couple of times and it still didn't work out satisfactorily.

I want to continue to buy and rehab property, but still have no long-term GC to plan projects, keep the ball rolling, comply with local requirements etc. I'm not a carpenter, painter, sheetrocker, electrician or plumber, but I can do the books, find the properties, make the analysis, have great credit, and fund at least a major portion, if not all, of the purchase. 

I've been reading about the "Waterfall Framework" for establishing equity between people working together in real estate acquiring businesses. (FYI, I've been told it's best not to refer to us as "partners," and our business arrangement is "NOT a partnership"). Also I live in Alaska and my investments will be here, fairly close to home, Anchorage, Eagle River, Chugiak, maybe the Mat Valley and everything must comply with the RE laws of the State of Alaska. 

1.  Is there anyone experienced in utilizing the Waterfall Framework in either a successful or horribly disappointing outcome? If so, please explain.  I know I've been very loose and trusting, with bad contracts or no contracts at all in the past which is why things didn't work out to well. When they didn't perform as promised I didn't take them to court, not wanting the grief. I totally take the blame for that. I always pay my bills or the bill for the person doing the work, I don't cheat anyone and I believe my expectations are reasonable.  I just keep hoping I'll find an honest, trust-worthy person who knows what they are doing......

2.  I want to be able to trust another person, as they will have to trust me, but how do we establish who does what and how much value does it add to the overall project? 

3.  Is the Waterfall Framework the best or only way to recognize each person's contributions? 

4.  Does anyone on BP have other suggestions for me?

5. For example, I envision establishing one LLC to include me and the GC, and that will cover the first property that we buy and work on. If all goes well and the misunderstandings aren't TOO great, we can continue and acquire another, utilizing the BRRRR theory. Although we may decide to sell.

6.  I need you folks with greater wisdom than I have had in the past to advise me. I've been so badly burned that now I'm afraid to try again and yet I know I bring a lot to the table as well, and it could/should be a successful venture for both of us.

7.  How in the world are good, long-term business relationships developed? 

Thanks for your advice.

[J Scott]

My recommendation is NOT to provide equity to a GC or any other contractors, unless they are bringing a LOT more to the table than just the construction management.  There are several reasons for this:

- Equity provides control, and you don't want to give a GC control of your business

- What happens if the GC doesn't perform well? You can't fire him from your LLC

- What happens if the exit strategy doesn't work out and you need to hold the property?  How does the GC get paid?

- What happens if the deal loses money?  Does the GC contribute to the losses?

- Etc...

There are lots of things that can go wrong on a project, and being tied to your contractors with equity makes issues MUCH more difficult to handle.