What are the typical percentages one would offer equity partners on development projects?
For example, I am very close to approaching a very high net worth individual, who I have a relationship with, about a few projects that I am working on in Hesperia, CA. The profit potential ranges from roughly 4 million dollars to 60 million.
What types of percentages should I be offering? Anyone with any experience?
Here is a proposed structure that I see often:
He puts in 100% of the equity and accrues a preferred return of 10% compunding annually. You both enter into the venture as 50/50 partners. You take a development fee during constuction of say 3% of hard and soft costs (excl land and dev fees).
When it comes time for distribution, he get all his pref back first, then his principal second, then you get a catch up to his principal, then you split 50/50.
Your real curveball is going to come in when that bank wants a personal guarantee on the loan. He probably wont want to be on the loan, and you probably dont have a strong enough balance sheet to get the loan. If you can get him to be a guarantor, you are golden!
Hope that helps.
sonda. that’s an awesome way to structure the deal…
Equity partners are usually seeking five to fifteen times a return and speaking in loan terms a relatively short amount of time.
Ten to fifteen percent is not going to cut it, and for any legitimate equity partners it’s going to have to be a very profitable deal.
i think it depends on the deal
if it is something that is fairly safe and secure then the return can be lower
There are several ways to approach it and everything is up for negoiation
I’ve offered as high as 25% fixed return plus a percentage of the profits
i’ve seen people offer a fixed return - the going rate - atleast where i am seems to be 20-25%
i’ve also scene the equity partner recieve an amount of the profit equal to his contribution
The biggest question they are going to ask is “when do I get my money back?”
I would work on the the exit strategy for each property before meeting with this individual
Jason sc
You should create a limited partnership company for each development you are doing.
For example for your first development, named " Golflink Country Estate" is a limited parntership company. Allow your equity partner to invest in ownership in this project and in return he gets shares on the ratio of ownership. ( He will be a limited parnter)
Since you own the land, sell the land from your company to this limited partnership company(Golflink) at an appraised ’ fair market value’. You will firstly make money in this area. ie: buy land for 1,000,000 and sell to the limited partnership company at FMV 3,000,000.
Instead of recieving money from the land, take it in shares. (2,000,000 in shares)
You will be the general partner of this development and as such are entitled to take a project managment fee of 5-10% and split the profit in the ratio of share ownership.
Sorab
Yo only mentioned the profit potential in your post. You didn’t mention how much the partner would be required to put in the deal or how much you were willing to put in the deal. I think the answers to those questions will have a big impact on the type of deal that can be structured. Typically, the larger the investment, the larger the expected return. So for your project that has a potential of $4M, if the necessary input is $3M, the investor may not be satisfied with a $2M (50-50) return on his $3M, he may want $3M. It all depends on the individual and how the deal is presented.