Question regarding land owner/developer partnerships

[Roger D Jones]

Hi all,

Just a newbie question seeking some quick insights on land development.  My brother and I own a simply spectacular piece of property overlooking the Columbia River in Washington State.  Right in town... breathtaking views.  Lot would need to be subdivided for two very large homes or two duplexes.  Obviously we need to do some groundwork with the City planning department and potentially zoning.

We are approached constantly by developers seeking to purchase the property for them to develop (everything from we want to build homes to help the environment to building condos for our 98 year old grandmother to live in).  We are wondering how we could best maximize our return on the property- either by partnering with a developer to eventually share returns or hiring a developer/general contractor/house builder ourselves and managing the project ourselves.  My brother and I are pretty smart guys but this is a venture we would be new to.  

What would you do?

Thanks in advance for the advice.

[Bryant Brislin]

A joint venture could end up being great for you, as far as entitlement, development and building are extremely difficult to do and risky. So it may be better to let someone else do the heavy lifting and take most of the risk (i.e. they be the sole guarantor on a construction loan, etc). You should have a transactional real estate attorney represent you when negotiating the Joint Venture Agreement and formation of the special purposes entity (i.e. an LLC) that you'll be a member/limited partner in. Of course you should vet the potential GP to make sure they have the wherewithal and bandwidth to execute the project correctly and in the most timely manner as possible.

[Roger D Jones]

Quote from @Bryant Brislin:

A joint venture could end up being great for you, as far as entitlement, development and building are extremely difficult to do and risky. So it may be better to let someone else do the heavy lifting and take most of the risk (i.e. they be the sole guarantor on a construction loan, etc). You should have a transactional real estate attorney represent you when negotiating the Joint Venture Agreement and formation of the special purposes entity (i.e. an LLC) that you'll be a member/limited partner in. Of course you should vet the potential GP to make sure they have the wherewithal and bandwidth to execute the project correctly and in the most timely manner as possible.

 Awesome advice... thank you so much.

[Kristi Kandel]

Quote from @Roger D Jones:

Hi all,

Just a newbie question seeking some quick insights on land development.  My brother and I own a simply spectacular piece of property overlooking the Columbia River in Washington State.  Right in town... breathtaking views.  Lot would need to be subdivided for two very large homes or two duplexes.  Obviously we need to do some groundwork with the City planning department and potentially zoning.

We are approached constantly by developers seeking to purchase the property for them to develop (everything from we want to build homes to help the environment to building condos for our 98 year old grandmother to live in).  We are wondering how we could best maximize our return on the property- either by partnering with a developer to eventually share returns or hiring a developer/general contractor/house builder ourselves and managing the project ourselves.  My brother and I are pretty smart guys but this is a venture we would be new to.  

What would you do?

Thanks in advance for the advice.

 @Roger D Jones just remember that you should really evaluate the terms around the JV agreement. There are all sorts of ways for contractors (or any partner) to hide dollars to minimize the paper profit. Since it doesn't sound like you have a pre-existing relationship with a builder I'd spend a LOT of time checking references and their other projects prior to picking a team. Then work with an attorney to help you structure the agreement.

Also don't be intimated by zoning & planning. I've been a developer for 17 years and your scale of project is one of the easier ones. Just call up the planning department and tell them what you told us so you can get proper expectations and clarity on your exact process. The more you know the more the JV partner knows you know and that goes a long way in protecting your upside.

[Ke Nan Wang]

Just a thought, are you in a position to develop other smaller project and learn from those experience first? 

If it's a golden piece of real estate like you said it is and you guys are all motivated, mentally and physically capable, I would keep this golden goose egg all to yourself. 

Seeking other smaller development opportunities first, maybe start with one residential property, work with the city's municipality, contractors and vendors. Gradually you will learn, gain experience, build the network to be in a better position to develop this high potential land. 

If you sell out now, you will mostly get penny on the dollar for what it could become because anyone who's taking on the risk to develop this piece of real estate will want to get it in a deal. 

If you start developing it or JV with other partners without any experience, I would doubt you even know what you can negotiate and what landmines and traps to watch out for.

So I say if you are capable of developing this and can afford to wait, wait until you become better and take on the lead position to develop this yourself.  

[Kristi Kandel]

Quote from @Ke Nan Wang:

Just a thought, are you in a position to develop other smaller project and learn from those experience first? 

If it's a golden piece of real estate like you said it is and you guys are all motivated, mentally and physically capable, I would keep this golden goose egg all to yourself. 

Seeking other smaller development opportunities first, maybe start with one residential property, work with the city's municipality, contractors and vendors. Gradually you will learn, gain experience, build the network to be in a better position to develop this high potential land. 

If you sell out now, you will mostly get penny on the dollar for what it could become because anyone who's taking on the risk to develop this piece of real estate will want to get it in a deal. 

If you start developing it or JV with other partners without any experience, I would doubt you even know what you can negotiate and what landmines and traps to watch out for.

So I say if you are capable of developing this and can afford to wait, wait until you become better and take on the lead position to develop this yourself.  

 @Roger D Jones What Ke Nan Wang said is very true. Right now in a partnership you'd either need a mentor/consultant to guide you throughout all aspects of the deal and partnership or wait and hold the land for now and gain the necessary experience to maximize your profits on this land in the future. If the JV partner is coming in with all of the experience they are going to be able to negotiate much better terms since you'd only be bringing the land into the equation.

Here's a snippet from our starter course on becoming a Local Real Estate Developer and it will help you understand where the value comes into a development project to see how to weight the equity and deal terms based on the experience of the partners in the deal.