GC Partnership Advice

5 Replies

Hello, I am looking to partner with a General Contractor on a project. The conversation has been based on the exchange of “Sweat Equity” for Partnership Equity. I am looking for advice on how to make the Contractor a fair offer. Outside of GC services, he does not intent to put cash in the project. The GC believes his costs will average around 30-33% of market value as his reasoning for pricing is 33% Material, 33% Labor, 33% Taxes.

What is a reasonable % of equity you would offer a GC? Also, I would want to make it incentive based including hitting Timeline, Budget, Other? Do you agree?

I look forward to your general feedback and recommendations. 

@Ray Hayward

I would start by defining a scope and creating an actual budget for the work to be performed.   Doing a full-blown rehab is one thing, doing a quick cosmetic turnover (replace carpet and paint) is another.   By defining the scope you can both agree on what needs to be done and create a budget, you can plug that number into your calculation and determine what the actual value is.  The average cost varies by trade and the type of work being done.  Two quick examples:

Changing a toilet

Labor = Assume 3 hours at $50/hr = $150

Material (wide range, assume something cost effective) = $150

This looks like a $300 job and a 50-50 split in labor/material 

Painting the interior

Materials = $500

Labor = crew of 4 x 8 hrs x $30/hr =960 (Assume 1,000)

Total cost  = $1,500 (Material 33%, Labor 66%)

In general, I agree with adding incentives in order to complete the work.  On projects, where the GC is supplying the material/labor and carrying the cost the incentive is to get the work done ASAP in order to sell and recoup the investment.   There are other things to be taken into account when determining an equitable split, including:

  • Who found the deal?
  • Who is financing/putting the down payment & closing costs?
  • What is the extent of the renovation (how risky is it)?
  • What is the total estimated turnaround (from acquisition to selling), how long does will funds be tied up?
  • Who is on point to market and sell it?

Thank you Milton!

I am the Developer for this project with the intent is to turn an old factory into a 20-25 unit apartment building. We need to make a decision on Rehab or New Construction. I will be hiring an Architect to draw a couple concepts and schematics then we intend use these plans to determine Construction Costs.

Thank you for your advice, here is my feedback to your questions:

Who found the deal? RH: I have found this deal.

Who is financing/putting the down payment & closing costs? RH: I will be paying upfront costs (Architect and Enviro Studies). Based on this information we will be able to determine if this the project is a “Go!”. We would then seek investors to finance Construction and exit to a bank long term. (We each have potential investors/lenders to pitch to if we find the deal is good) If he is able to help us find funding, there could be 2 other incentives (1. Finder 2. Signing the dotted line)

What is the extent of the renovation (how risky is it)? RH: High Risk.

What is the total estimated turnaround (from acquisition to selling), how long does will funds be tied up? RH: 15 Months

Who is on point to market and sell it? RH: The intent is to hold the property long term (Life of Mortgage which is anticipated to be 15-20 years for this deal) in a partnership with specific buy out clauses.

Enviro or Construction Costs First?

Enviro - To add to this, there is likely some environmental issues for this property and will be ordering a Phase 2 studies to be done. The results of the environmental study can be a deal breaker of its own.

Construction - We are in MA where current Construction costs avg $200 per sq ft. At this number, the investment would not work. The deal is a live because of this potential partnership.

For this deal to work, the Construction Costs and Environmental remediation variables need to be answered to determine if this is project is a “Go!”. That being said, would you invest environmental study or Construction Costs first? Each are “go or no go” decision points.

@Ray Hayward

I would go with the environmental study first.  The primary reason being time, you can get the study done in 30-60 days and get the bulk of the findings by then (asbestos, lead paint, underground storage tanks, etc.).  This will allow a contractor to put together a decent remediation estimate (I would include a reasonable contingency since these rarely go as planned and the moment you tear something down you find something else to deal with).  This will give you a go no go number on the environmental impact.  

If the GC has done or is doing similar projects you can create a quick estimate using cost per SF and this will give you broad all in number.  It will take the A&E about six months to create a 50%-65% design that the GC can use to develop actual pricing.   You may want to explore some incentives offered by cities/counties and even lenders when dealing with this type of project.  I believe Fannie or Freddie have a green development incentive that could lower financing fees.

Good luck

Thanks again Milton, very much appreciated!

Regarding, the Partnership, do you have a percentage in mind based on the variables mentioned?

@Ray Hayward

I would go with the environmental study first.  The primary reason being time, you can get the study done in 30-60 days and get the bulk of the findings by then (asbestos, lead paint, underground storage tanks, etc.).  This will allow a contractor to put together a decent remediation estimate (I would include a reasonable contingency since these rarely go as planned and the moment you tear something down you find something else to deal with).  This will give you a go no go number on the environmental impact.  

If the GC has done or is doing similar projects you can create a quick estimate using cost per SF and this will give you broad all in number.  It will take the A&E about six months to create a 50%-65% design that the GC can use to develop actual pricing.   You may want to explore some incentives offered by cities/counties and even lenders when dealing with this type of project.  I believe Fannie or Freddie have a green development incentive that could lower financing fees.

Good luck

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