Joint venture %age breakdown on new build

[3canctheayr]

Hi folks -



I'm working on an idea & would like some thoughts & input from those who have done joint ventures:



The project is a new build, with a few scenarios-

1. It would be kept & rented, It would involve 3 parties; A is the builder, B provides the financing and C oversees the project as well as runs it when complete. A owns the lot, worth about ~25% of the total project cost.



2. Same as 1, except C owns the lot.



3&4. Same as 1 and 2, except the project is sold for a profit at completion, with C handling the sale process.



What would be an approximate fair percentage ownership stake to assign each party in the scenarios and why?

 

[kfort]

My innitial thoughts are that 3 kids makes for a messy sandbox

 

[Thomas Beyer]

Lenders, in this case B, lend with terms, say 6-12% if you put up 20-30% of cash into it. Based on your other networth they may lend you 70% of construction cost. You need to come up with 30% of said cost, perhaps via a JV partner that gets 75% to 80% of the profit if all you bring is the lot.



C needs different skills than an operator after it is finished. I.e. you need person D, a property manager. C is a construction project manager.



Ideas are easy. Executing them in the real world takes real skills (both people, financial and domain skills), real money, real energy and real tenaciousness. Do you have those 6 ? If not find people that do and pay them. Some might do it for equity, many won't.

 

[3canctheayr]

Oops, I may not have been clear-

B isn't lending the money. They are bringing it to the table; ie. they will borrow the cash from a larger lender.



C Has all the skills you mentioned.

 

[Matt Crowley]

[quote user=ThomasBeyer]You need to come up with 30% of said cost



With the right financial credentials you need to typically come up with 30% of the equity for the completed project. Land counts towards that total equity tally. We develop land on that basis and some purpose built rental construction as well.



May be different depending on the scale, but there are two sources of equity: land equity and cash equity. The total between them needs to equal 30%.



Make sure those numbers are run until you are long, long past blue in the face. Large purpose built rental hasn't penciled in Edmonton for years. (Although I'm not really sure where you are building). It has often been a last resort exit strategy. (There are a few exceptions such as Broadstreet, but not many) The value creation is due to underlying value of an underutilized (but otherwise great) location rather than from value created from the construction build itself.

 

[3canctheayr]

The project is small scale res. and would be in SW Ontario. It's a model that I know works.



The main issue I'm working on is how the equity should be fairly split & why it should be done that way. All other issues I have figured out.

 

[REQRentals]

I would think it depends on the circumstances and margins on the build.



Here is one scenario that we previously came up with for investors building on our lots as a land swap and then paying out the contractor and lot from the mortgage if the property was rented.



Basically same as a typical rental JV but the manager keeps 50% even though the investor gets the mortgage.



I figured because the buy in at cost is 100K less than what they ended up selling for.



Still seems complicated. Easier to pay 12% on the construcion loan pus bonus on sale.

 

[Nir]

1. A-55%, B-20%, C-25%

2. A-40%, B-20%, C-40%

3. A-65%, B-20, C-15%

4. A-50, B-20%, C-30%



Estimates, mainly as there no mention of property value. The higher the value the less C gets except when owns the land.

 

[Thomas Beyer]

I would separate land from work, and treat the land as a cash/equity contribution. Then the cash&equity contributor gets 50-70%, 30% for builder. so if builder provides 25% of the equity as land builder gets about 40-45% and money partner 55-60%.



C is a new person and gets a % of rent.

 

[REQRentals]

[quote user=Nir]1. A-55%, B-20%, C-25%

2. A-40%, B-20%, C-40%

3. A-65%, B-20, C-15%

4. A-50, B-20%, C-30%



Estimates, mainly as there no mention of property value. The higher the value the less C gets except when owns the land.


That seems quite reasonable on the 20% for the money but it you were the investor would you not prefer to have a specific margin on your funds with a 1st mortgage plus a bonus on sale (assuming they amounted to the same $ ) ?



That way if there were a "black swan" event or the project ran over budget for some reason at least you would be guaranteed a margin on the construction loan in priority to anyone else's profits.



Also provides incentive to move the project as the interest costs keep running the longer the cash is out.



Also if the project is rented the money investor would have 75% of the cash out and only a 20% stake ?



Should he not get more ?



[quote user=ThomasBeyer]

I would separate land from work, and treat the land as a cash/equity contribution. Then the cash&equity contributor gets 50-70%, 30% for builder. so if builder provides 25% of the equity as land builder gets about 40-45% and money partner 55-60%.



C is a new person and gets a % of rent.


What if the property is sold ? Should C not get anything ?



I get it that C was not likely doing much in the way of actively managing the project other than putting together the deal and hiring a bunch of professionals but is that not what many real estate experts do other than those who are in it full time ?



For example if C knew of a great rental house and went to an investor to put up the cash would he (or she) not generally get some 20% equity for finding the opportunity and 10% for hiring someone to manage it and overseeing it etc.... ?



Why would C get any less for this deal ?

 

[Thomas Beyer]

[quote user=REQRentals]Should C not get anything ?


C should get a project management fee or perhaps 10-15% until the deal is done.



A typical general contractor fee is 15-18% of construction cost, assuming C is managing a lot of sub-trades.



Separate building from operating. Tww TOTALLY different businesses !



Ideally the project is sold from Build Co to Op Co with different parameters to pay out A, B and C and then operate the asset, perhaps after a refinance.

 

[REQRentals]

They also seem like totally different scenarios from a practical standpoint:



If A owns the land and is the builder than A probably knows what he is going to build and does not need C to manage his own project. C is only sourcing creative financing.



The 15%-18% builder margin for A is where C goes to A with a set of plans to build.



Before C does that he has to incur a lot of soft costs to determine what to build, at what cost, site requirements and and the other countless variables that go into a feasability study. Not just of "we should build a semi detached house" but to the point of having architectural plans, materials lists and subcontractor bids. Without this information it is not even possible for C to know what to pay for the land. Even with all of the info when you build a new plan for the the first time you often have variances from the estimate (plus or minus if you are lucky).



C should himself buy the land but regardless it is the accuracy of the above information and the efficiency of C's execution of it that that creates the value and the risk.



It is a considerable undertaking.



Unless C is planning to build a whole bunch of them such that he can re-use and refine the information the soft costs can be quite high.



Great if it comes together into a workable project. If not back to the drawing board (and more costs)



If an investor buys the land the land and C gets hit by a truck the land will presumably be worth what the investor paid for it if not more. Big hassle but little risk until build starts.



The R&D is laborious and skilled work which requires high risk capital.



It is also the backbone of the project, quantifies the value sought to be created and thereby determines determines what C should be paid

 

[3canctheayr]

[quote user=REQRentals]They also seem like totally different scenarios from a practical standpoint:



If A owns the land and is the builder than A probably knows what he is going to build and does not need C to manage his own project. C is only sourcing creative financing.



The 15%-18% builder margin for A is where C goes to A with a set of plans to build.



Before C does that he has to incur a lot of soft costs to determine what to build, at what cost, site requirements and and the other countless variables that go into a feasability study. Not just of "we should build a semi detached house" but to the point of having architectural plans, materials lists and subcontractor bids. Without this information it is not even possible for C to know what to pay for the land. Even with all of the info when you build a new plan for the the first time you often have variances from the estimate (plus or minus if you are lucky).



C should himself buy the land but regardless it is the accuracy of the above information and the efficiency of C's execution of it that that creates the value and the risk.



It is a considerable undertaking.



Unless C is planning to build a whole bunch of them such that he can re-use and refine the information the soft costs can be quite high.



Great if it comes together into a workable project. If not back to the drawing board (and more costs)



If an investor buys the land the land and C gets hit by a truck the land will presumably be worth what the investor paid for it if not more. Big hassle but little risk until build starts.



The R&D is laborious and skilled work which requires high risk capital.



It is also the backbone of the project, quantifies the value sought to be created and thereby determines determines what C should be paid






REQ-



In the first scenario A owns the lot, but doesn't actually have a specific plan for it, other than will 'build to suit' a residential unit(s). C would provide all the direction on what to build and how to build it(ie. type of construction method; stick frame vs ICF etc.)C would have the plans created. C would also co-ordinate the financing and handle any zoning issues etc.



I certainly agree about what you've mentioned about the prebuild soft costs etc.