All Forum Posts by: Jason L.

 Thank you @Darius Ogloza, I realize that factoring risk into the profit split is a bit subjective.  Any thoughts on how you'd split profit in the case where the is land used as collateral without co-signing (if that's even possible with lenders)?  Again assuming my partner is handling everything else?

 hi @Darius Ogloza, thanks for the comments. All great points.

The plan is that the partner would not mark up costs, recovering his GC markup through profit share. 

The additional capital question is a good one.  I guess I would try to put my partner on the hook for that. 

I have some draft Operating Agreement language that I think addresses your points on equity retention and adding a third party. It doesn't eliminate the risk but at least anticipates the scenario.   

"loan" was probably a poor choice of words. I'm not issuing a note.  My partner has proposed that the I'm paid for the land, along with interest, in second position after the CL. The profit share is paid (based on equity) after that.  I agree, it is mixing concepts.  

I'm curious how you think about the idea of co-signing and its effects on equity (if any).  If land is $1M and the value of his services (in calculating equity) is $500K, and we co-sign a $2M loan secured by my land, how should equity look?

 Thanks for jumping into this @Jay Hinrichs

- My CPA assures me that by retaining title (not transferring it to the partnership) I can enjoy cap gains on the land profits portion.

- All the costs you list are in the $2M.  I think the cost estimates are conservative, the sale price is more on the "best case" end of things. 

- I get the "hire a GC" argument. But I'm okay paying something (within reason) for an experienced partner who knows what to build for resale in this price range and will manage the entire process.   

- You mention my personal risk co-signing, but what would it look like if I didn't?  We bring in a third investor/partner?  What does my return look like in that case? Certainly far less than 50%.   So I'm back to trying to provide a rationale for demanding a higher profit share, preferred status at payout, or both. I'm curious about how folks would approach negotiating that piece. 

Thanks for the insights @Robert Ellis.

I'm totally aligned with your views on lowest cost/risk and the idea of basing equity on the valuation of each partners contributions.

I'm struggling with how to apportion equity (if at all) based on how my partner is proposing to do the construction financing; my land is collateral for the loan (I retain title vs transferring it or selling it to the partnership), the land is in second position at payout, I'm co-signing the loan, and my partner is not making an initial capital contribution.   

How do you think about this financing arrangement in terms of determining equity? 

Thanks again for your thoughts and time!

Hello BP,    I'm looking to build a spec home on a piece of land I own in a relatively affluent Bay Area neighborhood. I'm negotiating with a prospective partner who is an experienced developer/RE Agent in the area.  I've known him for 8 years and he has a good track record of flips and spec projects.    

 I've extensively researched BP forums and have spoken to other developers, builders, atty's, and CPA's about how best to determine profit share between partners based on 1)Risk, 2)Capital Contribution, and 3)The Role of Each Partner in the project . . . BUT, I've yet to find a cohesive "formula" or "rule of thumb" for weighting these factors and determining profit share. Hence my request for help . . . 

I'll sketch out the (current) terms first and then lay out my concerns/questions:

Proposed Terms/Assumptions:

- I contribute my land to the project receiving accrued interest at end of project (at rate similar to hard money rate). Land is used to secure a hard money construction loan (CL).  My land "loan" is subordinate to the CL. 

 - I Co-Sign with the developer on an interest-only construction loan (ideally a "no payments" loan).

- The developer acts as owner-builder-GC and is responsible for securing financing, managing all subs as well as overall Proj. Mgmt. Basically he does all the work.   

- We hire a third party CPA for project accounting

- The developer (who has RE license) gets the sell-side commission (paid before profit share).

- After the CL and Land are paid off the developer is proposing we split the remaining profits 50/50.

- Hypothetical Numbers*: Land value = $1M, project costs= $2M, sale price=$4m, profit=$1M

* These numbers are approximations.  We've done a thorough proforma which I've vetted and feel comfortable with.  "Project Costs" are comprehensive and include arch/permits/site prep/contingency/financing etc. There are strong, recent comps on which to base the target sale price. 

My Questions/Concerns:

1) The developer is asking me to co-sign on the CL.  Is this standard practice or a red flag?  If I agree, how should this factor into profit share?

2) With my land as the only real asset in the LLC (and second position to the CL) I'm assuming a lot (all?) of the risk should things go horribly wrong. How should this factor into profit share?

3)  Is it common for the developer not to have any upfront "skin in the game" (no $$ capital contribution)? How should I reflect this fact in the profit share?

4) The developer wants his RE commission paid before profit share.  Is this common and/or should it be reflected in lower profit share for him?

5)  If I were to value all of the services the developer is providing I could probably get to a figure of $300K - $400K (15% GC fee, 5% proj. mgmt).  How should the value of his contributions affect profit share?

I'd love to hear any and all  thoughts on how these different variables factor into determining fair profit share.   Many thanks!!

Jason