Wondering if anyone has any experience with obtaining equity in a project they are involved with?
I am working on a 6 unit building with retail on the first floor. This is the owners first development and they are not around enough to push the project forward. We have historical approvals and are now going through the planning board process. The project has been at a stand still for the last 6 months and no land use attorneys, engineers etc. have been retained. I approached the client who is very much interested in having me manage the project and push things ahead. I do not want to do this on a fee based but rather an equity position where I have some ownership. Does anyone have any thoughts on this?
Chad Miller
Jul 6, 22 10:48 am
Talk to the client. It's up to them. Then hire a lawyer.
MDH-ARCH
Jul 8, 22 6:37 pm
Definitely will be engaging with an lawyer when the time comes. The client asked me what my offer is, that's the part I am having a hard time with. Should I ask for ownership stake or a % fee to manage the project. Ideally I would like to get into development and this could be my opportunity if it make sense. Any other thoughts from anyone?
reallynotmyname
Jul 8, 22 7:59 pm
The % stake only makes sense if you and the other owners are on the same page as to when you all cash out of the project. Do you all plan a short term exit like selling condo units or fully leasing up the building and selling it to an investor. Or do you plan to hold the building for many years and take in annual rental income? A minority ownership stake in a property is very illiquid compared to the cash you would earn from a fee.
If you do the stake, can you afford to have no cash coming in from your work on the project while it moves toward completion? Also consider what happens if something like an economic downturn or planning politics sinks the project. Will the possible reward of the minority stake outweigh the risks?
It it were me, I might consider working for a fee with a contractually guaranteed opportunity to then buy a stake at a set price when the thing is actually built. Or maybe a combo of minimal cash fee and a stake in the building. I would want a really good attorney to write the agreement for me and also want someone to evaluate the financials of the development and tell if if was a good deal or not.
MDH-ARCH
Jul 20, 22 9:19 am
Thanks for the input, good points. Planning and holding as rental income would be the plan.
This involvement would take me away somewhat from my practice but I'm not too concerned about cash flow from this particular job being an issue. I think the reward for my time has the potential to substantially out way what I would charge for a fee.
I think fully understanding the deal like you mentioned is the critical step. I am having a hard time with proformas.
greenlander1
Jul 19, 22 1:12 am
Been on both sides of this. You could be in a pretty decent situation but kinda need to hear more details. Happy to discuss.
RJ87
Jul 19, 22 10:39 am
The equity / risk need to be explicitly stated in a contract. I knew someone who exchanged design services on a project for an equity stake, then when the project bellied up during development & the equity group owed money he lost everything. Ended up filing for bankruptcy.
MDH-ARCH
Jul 20, 22 9:25 am
I'd like to know more specifically how he lost everything? Was the building not owned under a separate LLC? I would need an attorney to draft up a contract that would protect all parties equally but yes the fear factor is there.
greenlander1
Jul 19, 22 1:24 pm
Part of it depends on whether your potential equity structure is GP only or GP/LP (raised capital outside of your client). I've seen a handful of scenarios where fees (architecture, PM fees, brokerage, etc) were rolled into the deal. It's obviously higher risk but if you believe in the project and want upside, thats the whole point of equity.
It's common for a GP (the developer) to charge 3-5% as development fee (project management for design, construction, financing, disposition, leasing, etc) of total project cost. Some apply this percentage to only hard + soft costs. Really depends on the size and difficulty of the deal.
You might be in position to ask for a development fee + maybe GP equity but really depends on how much the client needs you and exactly what your function is.
You should also ask yourself how well does this deal pencil. Someone doing their first deal might not have the sharpest underwriting skills and we aren't exactly in a good spot in the economic cycle for RE development. If you partner with him, I would ask for visibility in his proformas.
Feel free to DM me.
baboo.fei
Jul 19, 22 10:12 pm
Good heuristic might be if there are opportunities with better risk-adjusted yield than GP interest in some 6-unit MF development deal right now (at near double digit inflation + 75-100bps hike in like two weeks
). Obviously a lot depend on the details but honestly I’d take the cash and stay safe given the impending drawdown.
MDH-ARCH
Jul 20, 22 9:26 am
I'd love to pick your brain in more detail. I will be reaching out!
betonbrut
Jul 19, 22 3:42 pm
Similar to what others have stated, being a fee developer has less risk than an equity stake. The only thing at risk for you would be your time in this case. Perhaps less upside than an equity stake, but certainly less downside.
A good lawyer in this instance is cheap insurance for you either way.
MDH-ARCH
Jul 20, 22 9:28 am
I need a better understanding of the "risk" and "downside" The owner has offered me a substantial amount of equity and the upside is tempting.
Wondering if anyone has any experience with obtaining equity in a project they are involved with?
I am working on a 6 unit building with retail on the first floor. This is the owners first development and they are not around enough to push the project forward. We have historical approvals and are now going through the planning board process. The project has been at a stand still for the last 6 months and no land use attorneys, engineers etc. have been retained. I approached the client who is very much interested in having me manage the project and push things ahead. I do not want to do this on a fee based but rather an equity position where I have some ownership. Does anyone have any thoughts on this?
Talk to the client. It's up to them. Then hire a lawyer.
Definitely will be engaging with an lawyer when the time comes. The client asked me what my offer is, that's the part I am having a hard time with. Should I ask for ownership stake or a % fee to manage the project. Ideally I would like to get into development and this could be my opportunity if it make sense. Any other thoughts from anyone?
The % stake only makes sense if you and the other owners are on the same page as to when you all cash out of the project. Do you all plan a short term exit like selling condo units or fully leasing up the building and selling it to an investor. Or do you plan to hold the building for many years and take in annual rental income? A minority ownership stake in a property is very illiquid compared to the cash you would earn from a fee.
If you do the stake, can you afford to have no cash coming in from your work on the project while it moves toward completion? Also consider what happens if something like an economic downturn or planning politics sinks the project. Will the possible reward of the minority stake outweigh the risks?
It it were me, I might consider working for a fee with a contractually guaranteed opportunity to then buy a stake at a set price when the thing is actually built. Or maybe a combo of minimal cash fee and a stake in the building. I would want a really good attorney to write the agreement for me and also want someone to evaluate the financials of the development and tell if if was a good deal or not.
Thanks for the input, good points. Planning and holding as rental income would be the plan.
This involvement would take me away somewhat from my practice but I'm not too concerned about cash flow from this particular job being an issue. I think the reward for my time has the potential to substantially out way what I would charge for a fee.
I think fully understanding the deal like you mentioned is the critical step. I am having a hard time with proformas.
Been on both sides of this. You could be in a pretty decent situation but kinda need to hear more details. Happy to discuss.
The equity / risk need to be explicitly stated in a contract. I knew someone who exchanged design services on a project for an equity stake, then when the project bellied up during development & the equity group owed money he lost everything. Ended up filing for bankruptcy.
I'd like to know more specifically how he lost everything? Was the building not owned under a separate LLC? I would need an attorney to draft up a contract that would protect all parties equally but yes the fear factor is there.
Part of it depends on whether your potential equity structure is GP only or GP/LP (raised capital outside of your client). I've seen a handful of scenarios where fees (architecture, PM fees, brokerage, etc) were rolled into the deal. It's obviously higher risk but if you believe in the project and want upside, thats the whole point of equity.
It's common for a GP (the developer) to charge 3-5% as development fee (project management for design, construction, financing, disposition, leasing, etc) of total project cost. Some apply this percentage to only hard + soft costs. Really depends on the size and difficulty of the deal.
You might be in position to ask for a development fee + maybe GP equity but really depends on how much the client needs you and exactly what your function is.
You should also ask yourself how well does this deal pencil. Someone doing their first deal might not have the sharpest underwriting skills and we aren't exactly in a good spot in the economic cycle for RE development. If you partner with him, I would ask for visibility in his proformas.
Feel free to DM me.
Good heuristic might be if there are opportunities with better risk-adjusted yield than GP interest in some 6-unit MF development deal right now (at near double digit inflation + 75-100bps hike in like two weeks
). Obviously a lot depend on the details but honestly I’d take the cash and stay safe given the impending drawdown.
I'd love to pick your brain in more detail. I will be reaching out!
Similar to what others have stated, being a fee developer has less risk than an equity stake. The only thing at risk for you would be your time in this case. Perhaps less upside than an equity stake, but certainly less downside.
A good lawyer in this instance is cheap insurance for you either way.
I need a better understanding of the "risk" and "downside" The owner has offered me a substantial amount of equity and the upside is tempting.