Development Profit Sharing Advice

General Real Estate Investing
1

Hello All,

Need some ideas.

I am helping a passive investor acquire a rather large vacant lot with pending entitlements to develop a 100-unit condominium.

I will be doing all the due diligence on the lot, reports, plans, entitlements, sales forecast, etc. I will be verifying the project projected costs, performa and financial return prepared by the seller.

I will also be co-developing the project from start to finish. The project will take a minimum of 36 to 48 months.

I am not contributing any of my own money in this project, I am contributing some experience and a lot of my time for a long period. I am not asking for any salary during this time period, so I am taking on some risk as well. If the project does not return a profit, neither will I, so again this could be a big risk for me.

I like to receive a percentage for locating and acquiring the lot/project to start with. After the building is completed and we sell off the units, I like a percentage of the net profits after of course the investor realizes a fair return on his money. This is my first thought of creating this profit sharing plan. This is what I had in mind in terms of sharing in the profits.

I would love to hear the professionals weigh in on this, and/or if you have any alternative profit sharing plans. And what’s a fair return for my passive investor? He too will be taking a huge financial risk. And what’s a fair percentage for me for acquiring the project? And, how about the back end after sales? Looking for a fair win win arrangement.

Thank you for reading and for your anticipated comments.

Robert Young

2

Hi,

 Can you please tell me what state your development is in as it will help define some answers for you?

                    GR
3

Hello GR,

The development is located in California in a major city.

Thanks,

Robert Young

4

Hi,

There are a lot of parts that go into making a development like this successful! I read your posting and have some concerns in reguards to your development!

In development we have 100%, which is the gross price we will sell the development for and from this number we deduct all cost’s until we get to the point of a profit margin. We work these numbers on paper until we believe we can project a profit and still cover all cost’s.

When building single family homes, or building townhouses we have an opportunity to slow down, speed up or stop construction based on sales and cash flow, most big builders build out there developments this way, but when you build Condo’s the whole building is interconnected, or buildings are designed to be built with large numbers of units inside.

A Townhouse project can be built just like condo’s but it can also be built out as 4 unit buildings which allows the builder to circumvent the requirement for fire sprinkler systems and those associated cost’s.

I spent my career in California, I was involved in dozens of projects and a licensed A (Engineering) and B (Building) Contractor in the state for many years! The big builders operate on a profit margin of between 20 and 30% predicated on what they paid for the land and how long they have held it before development.

I would not close on the land until all of your approvals and entitlements are approved as to develop and build the property out is the only reason you want the land! (Unless of course you believe it would make a nice parking lot!

This property needs to be built and sold out in 9 to 15 months because to have 100 units of finished condo’s where your paying the carrying cost’s, all the utilities, the taxes, the insurance and carrying the HOA Fees and cost’s will eat every dime of profit and bankrupt the project before you hit a 36 month timeline, as the time to build the project should be 7 or 8 months!

I would actually get at least one hard bid on every trade involved in the project before you close escrow to buy the land, if you did not originally request a long escrow I would go back and extend it in line with your schedule to verify and perform all your due diligence and approvals from government for the development.

I would also go back through the “Finishes” schedule and verify or reduce cost’s in line with the market and financial requirements for the project. Do not depend on anything presented to you by the seller or sellers agent!

I think giving your investor a annual interest rate and 50% of the profits is fair and you end up with some portion of 50% dependant on how many parties are managing the development on behalf of your owner group! (You are a member of the ownership group).

I would like to see some of the other guys who do development add there thoughts here on a sales schedule, critical path for construction and the financial carrying cost’s of this project as I think you will find that the sooner it’s completed and sold, the more profits you will make!

Good luck,

              GR

I have to question the strength and desireability of the California Condo market???

5

Robert where are you in the design phase? Have you even started? The Architectural & Engineering fees are going to be in the range of 7-13% of the total project cost unless you can add some value there and drive some savings. GR made a great point about the markets ability to absorb these units. Have you done any market research into the prospective markets? I know California is tough right now. I would look to markets in Texas or other states that have better outlooks in the nearer term. Because your going to need a good story to get your financing. Here’s a good link

http://cire.epubxpress.com/link/CIRE/2010/sep-oct/18?s=0

With a 100 units it sounds like you’ll be somewhere in between 5 - 10 floors. What type of construction are you considering? Structural steel, Concrete, Light Gauge Steel Framing? Nucon Steel has a great light gauge system for this application. It will be your cheapest structural option between 5-8 floors.

http://www.nuconsteel.com/

If you are not bringing any money to the group, I would shoot for a 5-10% interest.

Just my 2 cents!

6

Sean,

EIR is almost complete. The entitlements will take approximately 12-15 months to obtain. We have already budgeted approximately $1.8 Mil for this alone. We hope the market will turn, we need to make $800 sq ft to move forward. If the market does not change in 12-15 months, will put the deal on hold. We have 3 years to break ground. The structure will be concrete.

Thanks for the links!!

Robert Young

7

On last piece of advise. Watch out for Architects.

8

Sean,

The architect is one of the key players securing the entitlements and attending hearings. The co-developers will be making the decisions on the GC and some subs. I don’t want to be over-billed or double-charged for his services. The architect might oversee the project with the co-developers as well. I’d appreciate if you can weigh in a little bit more on your last statement.

Thanks Sean!!

Robert Young

9

I would tell you this. First, off I wouldn’t want the Architect running the job. Have the co-developers hire a const manager that works for them manage the GC and the arch. The construction manager can help you achieve the right economic design. Architects tend to over design because their fee is based on total cost to construct. Architects can draw better than they can build. If that happens the field has to try to figure it out or it get sent back up for a 2 week RFI.

OWNER HIRES

  • Architect
  • Construction Manager
  • Hire GC with the aide of the CM
  • Hire HVAC Engineer with help from CM
  • Hire MEP engineer with help from CM
  • Hire Geotech engineer with help from CM
  • CM picks all subtrades after bidding process and review by owner

CM aides in creating the most efficient design through the design/build process. This way helps keep collusion out of the deal and you get a better performing project.

Design bid build is an outdated process.

10

Thank you Sean for the pointers!! I appreciate it very much!!