Karen, yes, you need to show the value of your contributions to other investors. If you have a sophisticated investor who regularly deals in RE, they will already know what the going rate is for what you will provide. Assign your value as a % of the MV or sale price.
Generally in business we speak in terms of % not as to dollars, as the dollar amount or value of a deal changes. If you speak in terms of funding X dollars you could have future issues, especially in construction, developments or in rehabs. Big difference in asking you to fund 350K for 42.5% of the deal and asking you to fund 50% of the project costs, as you can have cost overruns. Who pays holding costs in the future on a spec? Or, you may say fund 50% of costs for 50% of the deal and explain what your contribution is as an expense to the project. Charging X% as an expense can have some advantages:
1. With many investors it can be a psychological advantage speaking to them as the owners, referring to yourself as the contractor or project manager. They feel the skin in the game. While I understand funding 50% for 42.5% of a deal, it will sound better to say 50% for 50%.
2. It's easier to market and sell the concept of them being the owners paying expenses and relating their position or contribution to the expected value of the project.
3. In some instances, placing yourself in a position of providing services can limit your liability to those aspects of services provided.
4. Accounting is easier splitting capital accounts of investors to 100% and expensing your earnings.
5. By providing your services to a project without ownership can place you first in line to get paid! You could have an investor head to bankruptcy arising out of that project or from any other business or personal matter. You can be in a lien position and get paid from sale proceeds.
6. Another aspect of liability issues. A participation in a partnership under contract, construction or management, is not a recordable matter. Your name doesn't need to appear in public records as it is a private transaction. If others can't find your assets or sources of income, the chance of them going after you drops. Such contracts can be shown in you financial statements and can be used as collateral as with accounts receivables financing.
A downside is to any tax advantage, if you aren't an owner you won't be taking depreciation. As a service provider you'll have regular income, if your project is placed in service and held, you won't see the capital gains treatment, unless you take a % of ownership*.
Your fee can be negotiated from various angles but you need to explain, to some degree, the value of your participation. Fees can be a flat dollar amount or a % of the deal. You can also take a % of profits as an offset to more favorable fee structures charged, this is a good way to go as you agree to assume some risk to the end and disposition of the project.
It's common for contractors to take on management on a long term basis of a project, like condos or apartments. Management contracts can be compensated with a % of profits in addition to general administrative aspects.
* If you use a Sub-S, you could have a stock option to buy in or create a stock ownership position, the increase in stock value will be a capital gain.
There are endless ways to agree and structure a partnership. Many larger projects are accomplished on leased land with capital improvements. Instead of acquiring the land and selling, the land can be purchased (investors can be used here as well) and then provide a long term lease to the entity of investors holding the improvements.
Any business can be sliced into functions and contributions under a partnership. You can take a financing position inside a partnership agreement, an ownership position or a management position. With the creative use of first right of refusals, secured lending positions, options to purchase, construction contracts or leases you can profit from various positions, long or short term. :)
