Development Question?
My question I am a broker joining up with a builder going to by about 10 acres and develop (houses) to sell. Everything 50/50 cost to of project and splitting the profits. What is the best way to structure the deal and to go about it from the get go, buying the raw land to selling the houses individually? Should we structure an LLC and include all the details or what? Give all the ideas you can throw at me.
Thanks
:-?
Some thoughts, though not necessarily about structuring the deal...
1. Make sure you're complying with your state's disclosure requirements since you're RE licensed.
2. If you don't have prior experience with your potential partner, check him out thoroughly.
3. Both of you should have a RE attorney experienced with land development to do the contract, answer questions on type of entity and assignment, and for help during the approval process. The contract should have the customary subdivision & devel. contingencies as well as provision for an up-front feasibility/due diligence period.
4. Analyze the deal to make sure it's feasible (yield, realistic value of the new construction, site improvement costs, etc).
5. You're also going to need a good civil engr & surveyor.
thanks NancyChadwick
Here is the way I structure my projects. As the developer I handle the entitlements, construction, sales and I am responsible for the project's success. I use investor capital to finance my projects (usually for-sale residential).
I form an LLC for each project. Although negotiable, investors usually earn a preferred return on their investment (7-10% per annum) and a percent of the residual cash flow (anywhere from 25% - 50%). I usually aim for an investor to achieve IRR's between 25-35%.
As the developer I charge a project management fee (3-5% of project costs less land cost) payable as the project progresses and my share of the residual cash flow (after paying the investor's preferred rtn) of between 50% and 75%. Thus, it is in my interest to keep the project as profitable as possible.
In your situation, I would suggest that any contributed capital earn a preferred return, and that residual cash flow be split depending on the amount of work each party contributes. A developer fee may or may not be charged and a brokerage commission may or may not be earned - these are negotiable.
Be sure to work with an attorney to draft an agreement. An operating agreement will be needed to spell out the duties of each party as they pertain to the management of the project/LLC.
In terms of splitting the profits, think of who is taking the most risk and who is putting in the most effort. Obviously those taking more risk deserve a far greater return.
Something to discuss with your partner: Who qualifies for and guarantees the construction loan?