Help with JV partnership opportunity

5 Replies

Hello,

We have been long time readers of the BP site and have found a wealth of information. We have a single 12 unit property which has been in the family for a while. We have taken over the business for now what is 1 year and are excited about the future. We were proposed an opportunity on our first multifamily property and we could use a bit of information.

We were presented an opportunity to enter into a JV partnership and need advice on how to structure the partnership. Would like to hear any advice/help you wonderful folks at BP have to offer.

Developer wants to take out loan with us for costs to rehab of our 12 unit multifamily to improve value in order to sell (approx 200k loan). Developer will deal with construction and we will be responsible for regular operating of units. Developer to repair exterior and update 4-6 units. In a scenario like this, should the profits be 50/50? Developer would be making approx. 250k after sale if splitting 50/50. Does this seem like a fair amount? We understand that we are paying for developers time and experience but it seems excessive for the amount of work being done. What would be a reasonable split? 

@Ken D.  

Please explain profits?  Since you own the property right now (and have for a very long time) I'm not quite sure how you are calculating profits.  Are you trying to figure out what the as-is value of the property is today and then any forced equity after rehab is profit?  

I don't know a lot about the situation however it sounds like the rehab isn't that complicated. I would hire a solid GC to handle the work and not JV on the deal. Is the rehab complicated? Is the rehab going to be design intensive? If so hire a designer. How is the developer estimating construction costs? Is he going to make a profit on the rehab and then on the sale? I just don't think a JV is necessary for this type of deal.

I concur with not doing a JV, especially if the $200k loan will be secured by your property, i.e. the developer is bringing no cash to the deal. In essence, he is charging you a 100% margin on construction cost ($250k profit / $200k cost). That is insane, especially where it sounds like he has no cash in the deal. I would think it would be closer to a 15%-20% markup on actual cost for a GC to handle the rehab, i.e. $30k-$50k.

Thank you @Chris Winterhalter  

The developer will help secure the loan which will be against the property. Developer is looking to add about 700k in value to the property from the current estimated sales value. The profits would be 50% of the added value minus expenses which would be approximately 250k to the developer at the end of the deal.

The rehab work is not complicated but will take about 6 months. I currently work in another profession and am fairly new to real estate. The purpose of the partnership was to hopefully move things along but it seems that I'm being asked to pay a ridiculously high amount for their experience. What would be a reasonable percentage to offer in this case?

@Ken D.  

How well do you know the developer?  Are they know around town?  Do they have a good reputation?  How long have they been in business?  Do they have a proven track record with projects like these? 

If I were in your shoes I would...

  • Network with the real estate brokers in town that understand and your size and type of product.  Having a really good successful broker can go a long ways.  Look at the national presence shops like CBRE, Cassidy Turley, Marcus & Milichap, Hendricks & Partners, etc.  But don't leave out the local commercial real estate brokerage firms.  Check loopnet in your area to see what broker has the most listings between 5-50 units.  Talk to other investors.  You are going to want a good broker to help you evaluate the as-is & after repair value of the building.  
  • Is the building self managed?  If so I would connect with a really good property manager in the area.  Talk to them about rents, operating expenses, vacancy, turnover etc etc.  You might end up having the building professionally managed.  Either way it will help you evaluate your projections.  
  • Talk to local commercial real estate appraisers about your plan.  Is the financing bank going to perform an appraisal based on the projected value of the building? If so then this would be a good opportunity to talk to the appraiser handling the work. 
  • Talk to several really good GC's in your area who have a solid portfolio of similar product.  Similar product and design that will yield the highest return.  Get 3-4 bids from General Contractors and spend the time going over the bids and scope of works.  

If after you talk to all of these people you still want to partner with the developer you will be more than informed.  This will allow you to manage the developer with a lot more knowledge.  The developer could have the best intentions however you need to verify all costs and projections.  Good luck! 

+1 on @Chris Winterhalter comments.

Another thing that should be considered is the impact on tenants during construction. This is an issue our clients pay very close attention to when renovating any kind of building with tenants. Even the tenants who are in units not being worked on will be affected; dust, noise, parking, utility outages, etc. And remember contractors are optimists, projects rarely complete on schedule. Undiscovered issues, material availability, labor shortages and worst of all changes* in the design or the scope after construction is underway are things that through no fault of their own cause contractors to miss deadlines.

*At the construction company I owned I would tell customers that there are four main levels of cost in construction, each a magnitude of cost higher than the preceding level:

  1. 1. Manufactured; built in a factory and shipped to the site.
  2. 2. Production; where hundreds of similar buildings are built at a single site.
  3. 3. One-of-a-kind (used to be called custom but that term has been co-opted by production builders); building something that's never been built before... and
  4. 4. By Change Order.

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