A small developer I know has proposed a partnership that's pretty intriguing but I'd appreciate some opinions on it.
The developer owns free & clear land within a few miles of a big university. He's proposing building a 12 unit multifamily (all 1 bed/1 bath). He would provide the land and $150K in cash toward building the property. I would provide approximately $350K of financing through a commercial loan. He's proposing I would receive 20% of net profit from the rental income as well as 20% of the property value (minus land value). Below are some more details with the rough numbers:
12 (1 bed/1 bath units
Value of Land: ~$150K
Cost to Build: ~$500K
Rent is expected to be $700-$750/unit ($8400-9000 month)
Vacancy, management, expenses, CAPEX, etc: ~$4100/month
NOI: $4,300 to $4,900
Monthly Note ($350K, 20 yr AM, 5%): $2,309
Monthly Profit: ~ $2,000 to ~2,600
Annual Profit: ~$24K to ~31K
Value of property (low end estimate on an 8% CAP: $645K to $735K)
Average CAP rate for new builds in local area is ~6% CAP.
My 20% Ownership of Annual Receivables: $4,800 to $6240
Additionally, I would receive 20% of the property value (minus land) (which would vary depending on CAP rate but in the range of ~$100K to $117K.
The developer has a great reputation, has been in business for 13 years, and has built dozens of SFH's and MFH's in the area. The above numbers are rough and will be fine-tuned but the main question is, assuming the numbers meet our criteria, what's a fair way to split the partnership interest?
He's providing the land, ~$150K in cash, the design, and oversight as the general contractor. I'm only providing the ability to finance the build and should not be coming out of pocket on much other than the closing costs. The proposed 20% of annual profit and 20% property value sounds like a good deal, given the limited value I'm bringing to the deal. Is 20% more than generous? Or is a different % more appropriate? What value would you put on my involvement?
Any suggestions or opinions on this arrangement would be really appreciated!
The only question I have is why is he not willing to give you a share in the land value?
cap rate = NOI / Market value of the property (building and land)
does the value of the land remain the same over time if the building sells for a million do you subtract the $150 land value the $150 cash then balance of loan, say $300 after some payments. Would you receive & 80000, 20%of the $40000 profit.
@Rob Nichols , here is my suggestion for your counter-proposal:
You get 65% of the rents and three fifths of the property value, because YOUR sources are providing two thirds of the funding required! He can keep all the value of the land upon any resale.
@Joshua S. thanks for a suggested counter-proposal. If he's putting in $150K cash, plus the value of the land (~$150K) and I'm supplying access to the loan ($350K) then the total value would be ~$650K for a built property. In that case, I'd be providing about 54% of the funding/capital required. However, he'd be doing all the work managing the build and would have $300K of his capital tied up into the property while I'm not out of pocket on anything. I'd be comfortable getting less than 50% of the deal, but am not sure how exactly to value what percentage it should be.
Anyway, thank you gentlemen for taking the time to weigh in; much appreciated.
@Rob Nichols , the main reason I believe you ARE worth (at least) a 50/50 profit sharing is that I believe he will be paying himself along the way out of the $500k development "cost", which means that anything less than 50% to you will mean that he is double-dipping.
You should not underestimate the value (and risk) of the $350k that you are effectively providing. All the best...