Structuring a joint venture (if that's indeed the right term)

6 Replies

Hi All,

My wife and I have a rental property in Houston that we intend to put on the market in a few months, after doing some significant improvements. Because we live in Chicago, we'd like to hire not only a general contractor, but also a "project manager" of some kind to oversee the gc. Since we lived in the house ourselves a few years back, we know people in the area, including a trusted gc and a former real estate broker who is now a residential remodeling/design consultant. We're thinking of hiring the consultant to be the "project manager." She would have the keys to the house, make design decisions, keep the gc moving things along, coordinate with the real estate broker as needed, and just generally help us make it all happen.

My question is whether we're over-complicating the scenario if we want to incentivize the consultant, compensating her a modest amount for her time and effort, but letting her in on the up-side--the more profitable the project is, the more she personally makes.  If it's a reasonable approach, how do we structure it?

Thanks,

Shawn

It sounds pretty sound, you probably don't need to go into a JV scenario. You probably could draft contract for her to be your consultant and outline your expectations in a formal manner which includes your payment structure for her services.

Thanks, @Roland Thomas and @Jeff Greenberg !  The part I'm struggling with is how to tie her "bonus" to the overall project profit.  I would think it unfair (and unacceptable to her) for us to not define "profit" in advance, so she knows how it's going to be computed.  We'll agree to a target sales price, of course, and I guess we could just say something like, "all expenses incurred in bringing about the sale of the property (including, but not limited to, ...) will be subtracted from the eventual sales price, and the difference between that net amount and the agreed-upon target sales price will be deemed "profit."  Something like that?  That's what I'm looking for guidance on.

That seems alright but why not negotiate with her and see what she is will to take? Let them be the first to ask and then go from there. Who knows, maybe they don't want to JV and just want a straight salary and don't need expenses. Let them speak first about what they'd like and adjust from there

Hello Shawn.

I definitely think you are over complicating the objective.  Correct me if I am wrong, but you want to fix the place up and sell it for maximum profit and live happy ever after in Chicago.

As a Property Manager, I use the Property Management Agreement which I charge 15% of total cost for each repair, maintenance, alteration or redecoration.

As a Real Estate Broker, I use the Exclusive Right to Sell-Listing Agreement under Other Compensation where I charge 15% of total costs.

As an Investor (In State or Out of State), I use my remodel contract which holds the GC completely responsible for all completed work based on scope of work, time and compensation.  In other words, all subcontractors fall under the GC's contract and all SC's sign riders based on the GC's terms.

The scope of work is generated primarily by the market area and the top 3 to 6 sold properties in that market.  If those top sold properties have wood floors, granite counter tops, lush landscaping...then your property's SOW also will have wood floors, granite counter tops and lush landscaping or better.

If your former real estate broker changed careers and no longer has her license, than her compensation cannot be tied to the sell of the property, but can only be tied to the SOW. If she does have her license, than the SOW and the sell of the property should all be packaged and presented to you as a proposal for your sign-off. i.e. The JV model will not work in this scenario based on the rules of intention.

A good Property Manager and/or Real Estate Broker can handle of these pieces for you, it's what we are paid for...Hope this helps!

Thanks, 

Mario

@Mario Tavares -- Thanks very much for your thoughtful response!

It's funny that it didn't occur to me to engage a real estate broker who would also oversee the work by the GC, since this property was previously under professional management by a broker/property manager.  So I'm engaging two people--the broker and the project manager/designer--whereas your recommendation would be to use one...

Nevertheless, let's work under the assumption that's the way we're going to do it.  Now of course we can tie the project manager's compensation to the profitability of the project; that former broker and I can come up with any compensation strategy that's agreeable to both of us.  But I'm not hearing a whole lot of support for my idea, the point of which was to get the designer to do her thing (and manage the GC) at a lower cost than she would otherwise charge, in return for offering her some up-side.  Since we live in Chicago, I want someone else to be making the decisions (what color should we paint this bathroom, which countertop do you want, what kind of showerhead should we use, and all those other details).  I haven't worked with a whole lot GC's, but I've never worked with one who would just make all those decisions, let alone make good decisions that yield a fantastic outcome at a reasonable cost.  It sounds like you agree with that part; you would just suggest finding a real estate broker who would manage the project...

You did give me a baseline from which I can work, and that's 15%.  Maybe I can get the designer/PM to agree to 10%, with the possibility of a bonus if the final sales price minus sales commission minus all project costs exceeds some target number...

Thanks again,

Shawn