First Development :)

Content removed for personal reasons. This post was asking for advice on how to form equitable partnerships for the purpose of residential real estate development.

Content removed for personal reasons.

Be careful of general partnerships.

Think LP, LLC, or similar.

Some where on these forums, someone posted a great agreement for a joint venture structure. I just don't remember what it was called. I think SteveO has used the same format in his earlier ventures.

What I would have done:

1) Get a third party land evalution done (it needs to be a third party evaluation, otherwise the value would be either unfairly to his advantage or to your advantge. Neither is good). This is what your friends stake is worth.
2) Decide how much you will invest in the company (cash money as you mentioned). That is your stake. If you need to invest more later on, then you do another injection of capital and your stake and your friends stake then needs to be recalculated accordingly. See more about "pre-money valuation and post-money valuation", search Google or see some other of my posts about this.

You cannot just take a value from thin air, it needs to be realistic values (values that can be logicly explained). I understand that your friend wants to own the biggest stake of this venture, but if he tries to run you over, then just leave the deal.

Coincidentally, I am studying for an accounting test that is about accounting for partnerships, so I can consult my teacher. We will get a third party land evaluation done, and come up with realistic values. My best guess is that the property is worth two million dollars, I can bring 20,000 to the table, and will be doing all of the work. Im searching ”pre-money valuation and post-money valuation” on google right now. Hypothetically, If I didn`t want to inject any money into the partnership, but did all of the work, how much profit would you say I deserve?

Well structuring partnerships is hard. If your only bringing $20k to the table on a $2m deal, and doing all the work, I'd say thats worth 1/4 at most.

He has you by the balls on this one because he has the land and the money. His money is on the line, $20k won't cover much of a loss either. He who has the gold makes the rules as they say.

But look at it this way. X percentage of something is better than 100% of nothing, its your first deal so while you need and should make money, the experiance is more important.

I'd push for 50% cut of the profits. I'd talk to a RE attorney like you plan on for the partnership agreement. You want to protect your interest, and also spell who makes what, how to disolve it, and what happens if you lose money.

I don't have much experiance in this area because my deals so far are between family and more informal.

That's how i'm starting to think, something is better then nothing, but i'll try to get 50%. I forgot to mention that I will also be the construction manager and contractor. When I really think about how much I will be doing, settling for less then 50% is rediculous. I really believe that what and who I know makes up for the lack of money I can bring to the table. The person who owns the lot does not know what he is doing, he has been trying to develop another lot, and more then two years after construction started, nothing is finished (that is what his son said). He does own the land, if he wants to make a whore out of me and run me over he can do it, but I think that with playing investor, developer, and contractor, I deserve 50%.

Why do you suggest that I do this? I really will take anything, I don't think I will walk away, but I want to bargain without letting them know this.

Will:

You could be me! I'm in accounting (a controller, actually) and work for a decent sized ($50mil+) construction company. And that makes me worried.

First, there's this project your speaking of. You are 19 and still in school, from the sounds of it. You are saying you intend to be construction manager and contractor on a $2mil project. We have lost close to $1 mil on $2 mil projects before, and that is with a knowledgable management team with decades of experience running it.

How much experience do you have? If your family owns a construction company, and you've been putting in 1000 hours or more for the past 5 years, then "maybe" you have most of the knowledge to pull this off, but I wouldn't bet on it.

How familiar are you with bonding, retainage, permits, and all the water runoff regulations you'll need to comply with? What happens when you start digging and find bones? Or a buried oil tank? Can you read plan documents, and do you understand all the spec sections? AIA documents?

I've been working in this company for 12+ years now, and I had a tough time building a house. I would never dream of taking on a project like you're speaking of.

I'll give you this. You have guts. And you're ambitious.

When I was a couple of years older than you, I put together a proposal to a company to develop a new point-of-sale system, tied in with inventory controls and the works. I had a rough idea of what I was going to do to make it work (as I expect you do). I count my blessings that this guy turned me down, since I'd still be paying off the lawsuits.

Next issue -- there is a big difference between what you learn in school, and what happens in real life. Even in accounting.

What you are talking about doing is a business. And business isn't always nice, or fair, or fun. Well...I guess it can be, but then it isn't usually that way for long.

I'm assuming you'll be trying to do this project while you are still in school? That won't work.

With what you learn in school, you'd leave a list of things for your subcontractors to do, and when you checked in, they'd all be done. In real life, they wouldn't show up. Or they'd do it wrong. Or they'd damage another sub's work. You need to be there. All damn day long. And then you do the paperwork afterwords.

I guess what I'm trying to say here is that this is too big a project to cut your teeth on. Beg your parents to buy you a crappy house in town. Spend your $20k doing a rehab. If you can pull that off in under 3 months, then you "might" be ready for this. At worst, you'll be out $20k. And that's a lot less than you'll be out if the big project goes bad.

Finally, on to the partnership. When my son and I decided to partner to buy rental properties, I had the money, and he had the time. Here's what we did when we set up our LLC.

Initially, the split of capital was based on cash invested. I owned most of the company.

As we went through the year, we kept track of our time invested in the company. We calculated a "payment" to ourselves, based on hours times an agreed pay rate. Since he worked more hours than me, he "earned" some of my capital.

At the end of each year, our CPA reallocated the paid-in capital to reflect the sweat-equity we each had earned. This means that, little-by-little, my son has increased his ownership percentage.

We also mapped out duties for each of us: President, VP of Finance, VP of Operations, etc. We did this for just about every duty we could think of. We documented all of this, and put it into our Operations Manual.

We treated it like a business.

What I'm hopeful that I do is make you think twice about this. I think that, if you were a car, I'd hear your engine reving near the red zone. You are SOOOOO dying to do something, and you want it to be big.

I've read many of your threads, and they really do remind me of myself in my younger years. You have a million ideas, and you just want to get going on them. All of them. Right now.

I'll give you a bit of advice that I'm still struggling with.

FOCUS!

If you can take all your energy, and target it on just one concept, you'll likely succeed. But if you continue to dilute all your ideas by spending 10-120 minutes on them before jumping to another, you'll be reving that engine, spinning those tires, but going nowhere.

FOCUS!

Best of luck with that. I'm still having a tough time.

Well said Bob, I have said similer things to him before. I grew up in this business, and I'm still at least 5 years away from doing a deal by myself. The training wheels need to stay on for quite awhile.

To devlope you need to know everything about this business, and most of it can't be learned in books.

I am suggesting this because it makes no sense getting run over. Why should there be no real third party evaluation of the land? For all you know the land may be worth many times less than your friend say it is worth.

I have done small deals with friends, but all of them have been asked to specify the value by either third party evaluations or by showing the value in another way. Not just saying a number and then being cool with that. That is not how a real investor/businessman operates. Not a rich one at least.

In the end, you are in charge.