How to structure a JV

Question

Hello Big BP!

How would you structure a deal if my partner is bringing in all the risk capital, DP and CC to acquire a 4-plex that we’re planning to convert it to 5 units?

I’m thinking 95% to 5% as without him the project wouldn’t have any wings. I was thinking I can bring the reserves and pay for the conversion cost and asset manage the project

Do you typically leave the cash flow in a joint banking account with your partner?

Jeffrey K. · Answer

Hey Lamont,

There are a lot of variables to consider here and so many ways you could structure this. What value are you adding to the deal? if you are going to manage it and collect rents, that would be worth 8-10% at least based off of what a property manager would cost? Are you going to GC ant renovations? That would likely save the project 30% of materials. Did you find the deal? If there is day 1 equity, you would have another strong argument for increasing your share.

Another interesting facet of your deal is that you are crossing an important lending threshold. A property with 4 units or less qualifies as residential real estate: where as, 5 units or greater are technically commercial. There are pros and cons to each, but you will likely have a more expensive and higher LTV at 5 units.

Final answer...Take a look at what you are contributing, what your benchmark is making the deal worth your while and what is going to make the investor likely to invest with you again :)