Partnering with a contractor on deals

[John Timmerman]

We are working out a deal to partner with a very trusted contractor that we’ve worked with in the past many many times. But he is requesting some thing that I’m not completely sure makes sense.

The deal is for 50/50 Equity. The agreement is we cover the down payment, closing costs and financing, and he covers all renovations and construction costs.

When we refinance, we will split the refinance down the middle evenly. But whoever ends up paying more upfront gets priority pay back for the remainder out of monthly cash flow until the “initial investment” is perfectly even.

For instance:   
DP + closing = $50k out of our pocket  
Renovations = $60k out of his pocket   
Difference = $10k Which will be paid to him from the $500 monthly cash flow until recouped

The problem is he is saying that he doesn’t want to just count the cost of supplies and his employees, but he wants to bill his time as well as his employees time as part of his “initial investment”.   

So that might bump his “initial investment“ up to $80k. And now the repay amount goes to $30k.

This makes no sense to me because not only is he getting all the long term upside of buy and hold (equity, appreciation, etc) But he is also profiting from the work he is doing instead of counting it as sweat equity…

Am I missing something, or is this an unfair arrangement.

[Mike Dymski]

Need a fixed/set construction cost figure; otherwise, there is little incentive to manage costs and he can submit whatever he wants for his employees' time.  Ask me how I know...

If he did not bring the deal or any capital, seems like he should be a contractor rather than an owner.