how to structure a partnership for a small 3-6 house development

Question

Looking for suggestions on how to structure a partnership for a small 3-6 house development where I do not own the land. The owner is not willing to sell land outright, but open to "partnership." I am an architect and builder. I would be doing all pre-development research, architectural design and then building. Also, the owner of land may be able to provide some, but not, all funding. I have funding access, vision, and know-how, just not aware of the different ways a deal like this can be structured. If I am to invest so much time into this, I need owners complete commitment of land. Thanks for your advice!

Ben McMahon · Answer

Totally.  I would define the roles and assign a mutually agreeable dollar amount to the Architecture Contract and also the Building Contract.  You can even bring in a couple outside companies to quote them if it helps in the objective nature of things.

Depending on the need for financing, and willingness of each party, you may be able to get paid along the way through your construction loan, or whatever financing option you use.  Thats probably what I would push for.  Just so you don't get stuck if the deal goes south.  Basically just act as though your architectural firm was a 3rd party and you and the land guy are the owners.  Even though its one in the same.

When I do a JV project as the General Contractor I include everything that a normal builder would have.  Overhead and Profit, General Conditions, whatever is fair to you. You may or may not have to give up any of the backend by doing it this way, but at least you are covered.  Remember that the project wouldn't happen if you didnt do it, so you are entitled to the backend as well.  Its still Raw land at this point, and he probably doesnt have the knowledge or skill set to do this on his own.  If there isn't enough money in the project for both of you to be satisfied at the end, than it probably isn't worth doing at all.  At that point you might as well just keep doing what you normally do.

I know these things because I have spent countless hours on projects that seemed like an opportunity because I was a partner.  At the end of the day I would have made more money simply being a contractor to the project.  At least on an hourly basis.  Although there is a value to the education you receive.  So I wouldn't discredit that either.  That has dollar value in my book as well.

Ben McMahon · Answer

Make him a silent partner, start an LLC.  Should be able to have the details spelled out, but make sure you have decision making authority.  He can contribute the land as part of the deal.   See what sort of returns he might be looking for.  You might end up getting a better rate from your land owner partner.

On any JV I usually start with giving the investor his money back first, and than splitting profits.  Also if you have contributions you should also get paid back first.  The simpler you can make arrangement the better.

If you get into the project and decide not to move forward, you can dissolve the LLC and walk away.

Devon Garbus · Answer

To be honest, any real estate attorney worth a salt has written up agreements for this dozens of times. Call anyone, pay them $500 for the 2 hours of work, and tell him to structure it so everyone is protected.

David Benton · Answer

You can put any language needed into your JV and also your LLC Operating Agreement. Have an attorney bless your JV Agreement and LLC Operating Agreement before using it.

Here is a line in mine I usually tweak a little from one JV to the next but basically stays in- "Parties shall either themselves perform or oversee performance as applicable through third parties all necessary tasks to acquire, manage, lease, improve, renovate, sell resources and/or sell the properties included in this Joint Venture." Instead of Parties you can specify yourself or better yet form an LLC for your development side and another for Design and Construction. I do this all the time using one LLC for acquisition and another for development.

Your attorney can also help you with a Dissolution Clause in case you need to walk at some point. Helps to have this covered just in case. Best with your project. I haven't actually done a Partnership with a landowner yet but we are now drafting plans to pursue this.

Arseni Zaitsev · Answer

@Ben McMahon Thanks for the advice. Agree with KISS approach.

In a JV agreement, I'm curious how to keep my role as developer separate from the architecture and builder. At moment, I can do both, but things change. It would great to have the option to hire out the work as needed. My idea was to assign a % of construction cost value to both of these, considered as part of reimbursable. This way, the profits split at the end can reflect market value, but I get compensated earlier for the "service" work.

Javier C. · Answer

@Arseni Zaitsev Please keep us in the loop. I am very interested to hear how it turns out. I've had some very similar questions in mind.

how to structure a partnership for a small 3-6 house development

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