New Construction Partnership

[Rob Nichols]

Joint Venture Guru's,

Bottom line Up Front:  What's the value of being a co-signer on debt financing?

I was hoping to get some perspective/advice on a partnership offer. A developer I know has been building SFH's and MFH's for the last 10 years. He owns some acreage in a college town and wants to develop it for graduate student housing. We were in talks for me to purchase a couple SFH's on that land when the idea came up for us to partner on a larger multi-family building (26-unit). We're discussing doing this as a buy-and-hold vs a flip.

He owns the land (notionally valued at $200-250K). We anticipate the construction cost to be around $1.5M. He can't qualify for the construction loan by himself so that's where I fall in. I can qualify for the financing however, I don't have any commercial RE experience so the lender wants both of us to sign for the full recourse construction loan.   The broker we're working with said there shouldn't be a problem re-financing into a permanent non-recourse loan after 15-18 months.

The developer has all the expertise to oversee the build (finalizing the architectural design, dealing with the permitting, serving as GC, etc). Plus, he's contributing the land and can even contribute most if not all of the required cash/equity the bank requires.

For my part in qualifying for the $1.5M construction loan (full recourse), the developer is suggesting an 80/20 split on the deal.  Once the loan re-finances to a non-recourse perm loan, then he would want to drop my interest to 10% as compensation for doing the construction loan (as I would have no liability at that point going forward).  

If my roll were simply be a co-signer on the construction loan, what is a fair value for that?  If I were to bring some or all of the 20% required equity to the table, how would that change the partnership split?  

Thank you all in advance for any thoughts/suggestions!!