Investor / Builder type contract?

Question

A home builder is partnering with an investor to build a spec home. Investor will be financing the construction; home builder will perform the work. They plan to split the profit after the sale. What is the best way to structure the deal to protect both parties? Should they put 50/50 down on land? If investor pays for everything, how is investor made whole before profits from sale, etc? What are the specific clauses to include in the contract for this type of arrangement?   Investor paying cash and/or borrowing, and keeping track of everything and Builder doing all the work.  Thinking there should be 10-15% GC salary for contractor. But how do we deal with paying subs for example and does investor get full investment plus interest back before they both split the profits at the end. Does the fact that they are a "couple" simplify things or complicate them? We don't want to ruin the relationship but also seem to work well together on projects. Thank you.

Travis Sperr · Answer

As complicated as this is, it is relatively simple, you could handle via a contract or an entity with an operating agreement. Contract is probably cleaner as you could more clearly define defaults and remedies in the agreement that would allow for a breakup. The partnership is easier to capture items like capital calls and change in equity. The way the money flows is pretty simple, all the equity invested is returned first - this could be down payments, interest payments, construction costs of overages, etc. Then any preferred return if part of the agreement ( you mention interest on investment). Then profits are split according to the agreement.

I have never understood why investors partner with builders or GC's, unless the  GC is bringing money or signing on the loan. A profit split will almost always cost more than just paying the GC fee, and I would never pay a GC fee and split profit, unless they brought significant value to the deal- financing, cash, land, the deal, etc.

Ultimately you need an attorney involved.