This is normal and nothing to be overly concerned about.

Normally I would never use a contractor on aa flip, but this was a friend. 

What is the best way to handle it so that both LLC members have a skin in the game?

Just remember you are spending time and money to improve a space that isn't yours and you're not able to take the improvements when you leave, ownership should have some skin in the game especially in a new build.   

Concern: LA’s landlord laws, headaches from self managing, a good deal may still have tenants occupying it, if I ever leave it's an alligator so it costs more than the income it makes3️⃣ Out-of-State Rental – Get skin in the game sooner by buying a cash-flowing property elsewhere.

What penalties are normal for this type of partnership?

To play devil's advocate (and keep in mind I have no skin in this since I'm in a different market):-You want to tailor to investors, then be prepared to sell at an investor price. 

Is this normal? 

@Kyle DeboerEveryone is going to want to see some skin in the game.

LLCs are normal for CRE, so you divvy up the ownership interest how you and your capital partner(s) see fit.What's your specific question?