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?
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!
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.
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.