Landowner / Developer JV deal

[Christian Maddison]

Hello, I am about to enter into a landowner / developer JV deal and I want to be sure all bases (or as many as possible) are covered. I will not yet say if I am the landowner or developer because I want to see if the deal is fair (or at least reasonable) to both sides. The land is a half acre lot and is owned outright by the landowner.

The proposed deal (numbers are just for example sake):

• - half acre land value = $300K
• - developer will build 6 SFHs on the half acre (covering all expenses); build cost = $150K / house; total = $900K (6 houses) + $100K (soft costs) = $1M
• - developer charges $120K for services (to be included in build cost, not separate)
• - developer will get three of the houses to sell and keep 100% profits (minus land value); houses sell for $330K each = $990K - $450K (build cost of 3) - $300K (land value) - $50K (soft costs) = $190K net profit
• - landowner will get value of the land paid back and the other three houses (minus build cost); landowner to keep 2 free and clear for STR / LTR
• - landowner will sell one house to cover the building costs of the other two; $330K (sale of one house) - $150 (build cost) = $180 (profit to cover build cost of other 2 houses); $350K (build cost of other 2 houses + soft costs) - $180 K (sale profit) - $250K (land value from 5 of 6 houses) = $80K cash in pocket

Holes? Missed calculations? Either side winning much more than the other?

Thanks in advance!

[Nancy Truong]

What about the costs for permits, legal documents (drafting the agreement, timeline, etc), title, survey, and insurance? What's about incidental expenses?

[Christian Maddison]

Those are in the soft costs (again, these are just example numbers)

[Chris Seveney]

@Christian Maddison

Typically what I have seen in these types of deals is the landowner will sell it for $x per lot and get an upside which is done through a 3rd party audit. So let’s say it was $100k per lot and the landowner would get x % of every dollar for every house sold for more than y.

[Mike Wood]

@Christian Maddison  In your scenario, the developer is taking all the risk, with the land owner taking none.  From my perspective, the developer should just purchase the land for its value and remove the land owner from the equation.  In your scenario, the developer is putting up $1mil to build out, the land owner is putting up no cash.  The developer is making $190k on $1mil invested 20% cash on cash return, if everything goes right, the land owner is making $490 in equity on the three houses, plus getting paid $300k for the land, so $790k for ZERO money invested.  This deal is stupid for any developer to take.  Also, assuming your numbers are even remotely near reality, there valuations indicate its super highly desirable areas, and such the developer would likely look elsewhere for a development site.  Again, the developer is taking all the risk, providing alot of capital, and the land owner is doing practically nothing.

I'm hoping your the land owner in this scenario.