Real estate developer equity split question
Hello
Relatively new to commercial real estate and therefore having some trouble analyzing a deal. Was hoping to draw on the collective knowledge of bigger pockets to get an opinion!
Basically through good fortune and luck our family owns a plot of very attractive land in the path of urban development. Currently we run our business in a warehouse on the land. Our land first jumped in value when a professional sports stadium was build two blocks away about 10 years ago. Next year another professional soccer stadium being built on the other side of us will open. The cherry on top is last month a road redevelopment plan with green belts and walkways with a landmark bridge was announced in front of our property. All of a sudden multiple developers have been approaching us about the land.
For many different reasons, rather than cashing out completely, we started listening to developers interested in partnering with us to construct on the land. What I am having difficulty determining is how much sweat equity a developer should be entitled to. Basically our land is going to be contributed towards the equity in the deal. Our land comes out to 50% of the equity being footed. Although we are contributing 50% of the equity, the experienced developer we are most interested In partnering with is proposing we receive only 15% of the cash flow once the property is built and stabilized. Looking over other development deals I would have expect cash flow proportion to be more in line with the equity split up front, pari-passu. I understand that there is a premium the sponsor is entitled to and therefore they deserve an oversized chunk of the pie, but I thought given the amount of our equity contribution, our cash flow split should be at least 35-40%. Is it common to give experienced developers such a premium for their sweat equity? They are already getting a development fee. The sponsor argues that they get credit for bringing the millions of financing their reputations allows them to secure to get the project done. They calculated 15% of the cash flow based on the proportion our equity contribution represented out of the total project build out cost.
I am not sure what other details are needed to answer my question but I am feeling like these developers might be trying to take advantage of the fact that we aren’t that experienced in real estate deals. I am hoping to try and determine whether there is some expected norms in real estate development deals.
Thanks.