First Flip, JV/Profit Share with our GC

[Brian Dalton]

We are very excited to embark on our first flip!  Our question is about structuring our operating agreement with our GC related to the topic of profit sharing.  We have a personal relationship with a very experienced GC, which was one of our reasons for pursuing a flip as opposed to other investments.  Our GC would like to profit share with us in exchange for his years of expertise, project management, oversight of subs and sweat equity in the project.  If we did not know this person, we would not consider this route, but as a trusted and experienced contractor - this does not seem unreasonable to us.  This also motivates him to align to our goals of completing a quality project, on time and within budget.  Overall, our goal is to build a successful business WITH our GC.

Our question is, what is a reasonable split?  50/50?  60/40?  We want to be respective of the experience and skills that he brings to the table with a view to the future.  Insight would be appreciated.

[J Scott]

If he's not doing anything other than the contracting work, I don't see why you'd give him equity?  What happens if the relationship goes south, he gets hit by a bus, he does a bad job on the rehab, he runs out of money, etc., and you want/need to hire a new contractor?  Does your friend still get his percentage?  Some pro-rated amount?

Personally, unless a contractor is bringing a lot more to the table than just the contracting work, I see no reason to give up equity -- all you're doing is creating risks should you need to bring in another contractor for any reason. 

If you're just looking to be nice, hire him to do the work at an inflated rate.  Or hire him at a regular rate and then given him a bonus when the flip is sold.  At least those ways, you're not giving up any control of the deal/decisions.